Keywords: Inflation, transactions services, financial sector, money demand
Abstract: Traditionally, the cost of expected inflation has
been seen as the "shoeleather cost" of going to the bank more often.
This paper focuses on the other side of these transactions--i.e., on
the increased production of financial services by financial firms.
I construct a model in which households must make purchases either with
cash or with costly transactions services produced by firms in the
financial services sector. Higher inflation leads households to
substitute purchased transactions services for money balances,
increasing the size of the financial sector. A test of the model
using cross-sectional data suggests that this effect is large.
Full paper (3423 KB PDF)
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