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Measuring the Welfare Costs of Inflation in a Life-cycle Model

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  • Paul Gomme

    (Department of Economics, Concordia University)

Abstract

In a neoclassical growth model with life-cycle households in which money is held to satisfy a cash-in-advance constraint, the optimal steady state inflation rate is not the Friedman rule -- it is in excess of $20\%$. Lump-sum, age-independent money injections twist and flatten the lifetime profile of utility, making this profile look more like the one that would be chosen by a planner. The cost of monetary finance of lump-sum payments is the distortion introduced to the labor-leisure choice.

Suggested Citation

  • Paul Gomme, 2012. "Measuring the Welfare Costs of Inflation in a Life-cycle Model," Working Papers 12008, Concordia University, Department of Economics.
    • Handle: RePEc:crd:wpaper:12008
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    File URL: http://paulgomme.github.io/life-cycle-money-revised.pdf
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    References listed on IDEAS

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    1. José-Víctor Ríos-Rull, 1996. "Life-Cycle Economies and Aggregate Fluctuations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(3), pages 465-489.
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    Cited by:

    1. Nurlan Turdaliev, 2019. "Heterogeneity and monetary policy," Journal of Economics, Springer, vol. 128(2), pages 119-145, October.

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    More about this item

    Keywords

    monetary policy; inflation; welfare costs; life-cycle model;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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