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Inflation Uncertainty and the Cost of Inflation


  • Pierre Ouellette
  • Alain Paquet


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.

Suggested Citation

  • Pierre Ouellette & Alain Paquet, 1999. "Inflation Uncertainty and the Cost of Inflation," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 195-214, February.
  • Handle: RePEc:cje:issued:v:32:y:1999:i:1:p:195-214

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    JEL classification:

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


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