Inflation Uncertainty and the Cost of Inflation
AbstractIn this paper, the authors develop a measure of the cost of inflation uncertainty where a risk premium can be interpreted as the amount of real consumption that a representative agent is willing to forgo in order to be guaranteed a perfectly anticipated path of inflation. This premium can be calculated based on the estimation of a utility function that takes into account portfolio adjustment costs with respect to money balances and bonds, subject to a budget constraint that includes the after-tax returns on savings. With Canadian and U.S. data, it is shown that economic agents' preferences are such that the uncertainty of unexpected inflation was not big enough to induce a large premium.
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Bibliographic InfoArticle provided by Canadian Economics Association in its journal Canadian Journal of Economics.
Volume (Year): 32 (1999)
Issue (Month): 1 (February)
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Postal: Canadian Economics Association Prof. Steven Ambler, Secretary-Treasurer c/o Olivier Lebert, CEA/CJE/CPP Office C.P. 35006, 1221 Fleury Est Montréal, Québec, Canada H2C 3K4
Web page: http://economics.ca/cje/
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Other versions of this item:
- Pierre Ouellette & Alain Paquet, 1992. "Inflation Uncertainty and the Cost of Inflation," Cahiers de recherche du DÃ©partement des sciences Ã©conomiques, UQAM, UniversitÃ© du QuÃ©bec Ã MontrÃ©al, DÃ©partement des sciences Ã©conomiques 9205, UniversitÃ© du QuÃ©bec Ã MontrÃ©al, DÃ©partement des sciences Ã©conomiques.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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