Welfare cost of inflation, when credit card transaction services are included among monetary services

Abstract

Abstract We investigate the welfare cost of anticipated inflation, when the volume of credit card transactions is included in measured monetary service flows. We use the credit-card-augmented Divisia monetary aggregates in a nonlinear dynamic stochastic general equilibrium (DSGE) New Keynesian model and calculate the welfare costs of inflation. The welfare costs of inflation with credit card services included are greater than without them in the New Keynesian DSGE model. Because of the complexity of the model’s dynamical structure, we are not aware of a simple explanation for the increased welfare sensitivity to inflation.