Inflation, credit, and indexed unit of account

Hyung Sun Choi, Ohik Kwon, Manjong Lee

Research output: Contribution to journalArticlepeer-review

Abstract

A simple monetary model is constructed to study the implications of an indexed unit of account (Indexed-UoA). In an economy with an Indexed-UoA, the credit-trade friction attributed to inflation can be resolved and unexpected inflation causes no redistribution effect between debtors and creditors. However, in an economy without an Indexed-UoA, credit trades occur only if inflation is not too high and unexpected inflation renders debtors better off, but creditors worse off. In a high-inflation economy, money is used as a unit of account for spot trades only and an Indexed-UoA emerges as a unit of account for deferred-payment trades.

Original languageEnglish
Pages (from-to)144-154
Number of pages11
JournalInternational Review of Economics and Finance
Volume41
DOIs
Publication statusPublished - 2016 Jan 1

Bibliographical note

Funding Information:
We would like to thank the editor and the anonymous referee for their helpful comments and suggestions. Manjong Lee gratefully acknowledges the financial support from the National Research Foundation of Korea grant funded by the Korean Government ( NRF-2014S1A3A2044238 ).

Publisher Copyright:
© 2015 Elsevier Inc.

Keywords

  • Deferred payment
  • E31
  • E42
  • E50
  • Indexed unit of account
  • Inflation
  • Welfare

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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