← Search

Inflation, Interest Rates, and Welfare

Paul R. Krugman¹; Torsten Persson²; Lars E. O. Svensson²

¹ Massachusetts Institute of Technology · ² Institute for International Economic Studies, University of Stockholm

This paper develops a simple general equilibrium model of a monetary economy with a capital market. Money demand arises from a “cash-in-advance” constraint rather than from any direct role in the utility function, and uncertainty gives rise to a meaningful portfolio choice between money and bonds. We show that velocity is increasing in the rate of inflation, and that the optimal monetary policy is that which maximizes real balances. We also show that the real rate of interest is not invariant to monetary, policy: inflation lowers the real rate.

DOI

10.2307/1884374

Volume

100 (3)

Pages

677

Export

BibTeX

Sources

openalex crossref