On the Infinite Welfare Cost of Inflation and Other Second Order Effects
AbstractThe optimal inflation rate is analyzed in a simple model of intertemporal general equilibrium where agents have an operative bequest motive and taxation is distortionary. Monetary balances are used as a productive input, and agents have perfect foresight. The optimal value of the permanent inflation rate can be approximated by a simple formula. The case in which the growth of aggregate income exceeds the social discount rate is unlikely to be important, and the optimal value of the permanent inflation rate depends on the existence of a short-run trade-off between unemployment and inflation.
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Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 598.
Length: 31 pages
Date of creation: Jul 1981
Date of revision:
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
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