Eden, BenjaminEden, Maya2016-02-032016-02-032016-02https://hdl.handle.net/10986/23730This paper studies the possibility of using financial regulation that prohibits the use of money substitutes as a tool for mitigating the adverse effects of deviations from the Friedman rule. When inflation is not too high regulation aimed at eliminating money substitutes improves welfare by economizing on transaction costs. The gains from regulation depend on the distribution of income and the level of direct taxation. The area under the demand for money curve is equal to the welfare cost of inflation only when there are no direct taxes and no proportional intermediation cost: otherwise, the area under the demand curve overstates the welfare cost of inflation when money substitutes are not important and understates the welfare cost when money substitutes are important.en-USCC BY 3.0 IGOMONETARY POLICYDEPOSITHOLDINGINCENTIVEDURABLE GOODSGOVERNMENT BANKMARKET STRUCTUREDEPOSITSPRODUCTIONLAGSSUPPLY CURVEPRIVATE LENDINGINCOMEINTERESTRATE OF RETURNLIQUIDITY CRISESMARGINAL COSTVELOCITY OF MONEYMONEY SUPPLYGOVERNMENT SPENDINGSAVINGS ACCOUNTSINTEREST RATEPORTFOLIO CHOICEOPTIONEXCHANGEGOVERNMENT REVENUESBANKING SYSTEMLIQUIDITYELASTICITYREAL INTERESTPOLITICAL ECONOMYREVENUESPORTFOLIOWELFAREBONDSDISTRIBUTIONLOANBUDGET CONSTRAINTSTAXINCOME TAXSOCIAL COSTGOVERNMENT BONDRETURNS TO SCALEPAYMENTSRESERVETRANSACTION COSTINFLATIONINTERNATIONAL BANKLENDERBUDGETOPTIMUMECONOMIC ACTIVITYCHOICELABOR MARKETSAVINGSDERIVATIVESDEMAND FOR MONEYCOSTSSHORT-TERM BONDSMORAL HAZARDCHECKING ACCOUNTRESERVE BANKDOLLAR PRICEMONEYCONTRACTSLOW INTEREST RATESTAX REGIMECONSTANT RETURNS TO SCALEEXCHANGE RATESLIQUIDITY CONSTRAINTSPRODUCTIVITYOPTIONSINTEREST RATESDEPOSIT ACCOUNTSDEBTMARKETSRETURNINFLATION RATEPUBLIC FINANCEDEPOSIT INSURANCEOPEN ECONOMYBOND OPTIONPOTENTIAL OUTPUTLABORLOANSTAX REVENUESREAL INTEREST RATEUTILITYINVENTORYRESERVE REQUIREMENTFINANCETAXESSAVINGS ACCOUNTEXPENDITURETRANSACTIONSRESOURCESMARKET ECONOMYCHECKING ACCOUNTSTRANSACTIONCONSUMPTIONRISK NEUTRALBUDGET CONSTRAINTFEDERAL RESERVEINTEREST PAYMENTSPRIVATE BANKGOODTAX RATEAGGREGATE SUPPLYGOVERNMENT BUDGETFEDERAL RESERVE BANKFINANCIAL CRISISVALUERETURNSNATIONAL DEBTCREDITMACROECONOMICSPRIVATE BONDSDEMANDUTILITY FUNCTIONINCOME DISTRIBUTIONCONTRACTINEFFICIENCYEXPENDITURESCONSUMERSWorking PaperWorld Bank10.1596/1813-9450-7553