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Inflation Uncertainty and the Cost of Inflation

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Abstract

In 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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Suggested Citation

  • Pierre Ouellette & Alain Paquet, 1992. "Inflation Uncertainty and the Cost of Inflation," Cahiers de recherche du Département des sciences économiques, UQAM 9205, Université du Québec à Montréal, Département des sciences économiques.
    • Handle: RePEc:cre:uqamwp:9205
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    Keywords

    Inflation; coût de l'inflation; incertain; prime de risque. Inflation; cost of inflation; uncertainty; risk premium.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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