Working Paper: NBER ID: w25385
Authors: Pablo Kurlat
Abstract: Since bank deposits and currency are substitutes and banks have monopoly power, higher nominal interest rates lead to higher deposit spreads. This raises the cost of transaction services, increases bank profits and attracts entry into the banking sector. Taking these effects into account, a one percentage point increase in inflation has a welfare cost of 0.086% of GDP, 6.9 times higher than traditional estimates.
Keywords: Welfare cost of inflation; Deposit spreads; Monetary economics
JEL Codes: D43; E31; E41; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher nominal interest rates (E43) | higher deposit spreads (G21) |
| higher deposit spreads (G21) | higher transaction costs (D23) |
| higher transaction costs (D23) | higher welfare costs (I39) |
| higher nominal interest rates (E43) | higher bank profits (G21) |
| higher bank profits (G21) | entry into the banking sector (G21) |
| one percentage point increase in inflation (E31) | welfare cost of 0.086% of GDP (D69) |
| inflation (E31) | higher deposit spreads (G21) |
| elasticity of demand for deposits (E41) | 0.20 (C29) |