Rebalancing frequency and the welfare cost of inflation

Cash-in-advance models usually require agents to reallocate money and bonds in fixed periods. Every month or quarter, for example. I show that fixed periods underestimate the welfare cost of inflation. I use a model in which agents choose how often they exchange bonds for money. In the benchmark specification, the welfare cost of 10 percent instead of 0 inflation increases from 0.1 percent of income with fixed periods to 1 percent with optimal periods. The results are robust to different references, to different compositions of income in bonds or money, and to the introduction of capital and labor.

Financial support from NOVA FORUM, INOVA, and FCT PTDC/ECO/72021/2006