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On the Infinite Welfare Cost of Inflation and Other Second Order Effects


  • Christophe Chamley


The 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.

Suggested Citation

  • Christophe Chamley, 1981. "On the Infinite Welfare Cost of Inflation and Other Second Order Effects," Cowles Foundation Discussion Papers 598, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:598

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    References listed on IDEAS

    1. Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
    2. Summers, Lawrence H., 1981. "Optimal inflation policy," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 175-194.
    3. Siegel, Jeremy J., 1978. "Notes on optimal taxation and the optimal rate of inflation," Journal of Monetary Economics, Elsevier, vol. 4(2), pages 297-305, April.
    4. Shoven, John B, 1976. "The Incidence and Efficiency Effects of Taxes on Income from Capital," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1261-1283, December.
    5. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
    6. Brock, William A & Turnovsky, Stephen J, 1981. "The Analysis of Macroeconomic Policies in Perfect Foresight Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(1), pages 179-209, February.
    7. Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-549, September.
    8. Drazen, Allan, 1979. "The optimal rate of inflation revisited," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 231-248, April.
    9. Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, vol. 48(3), pages 565-576, April.
    10. Pestieau, P. M., 1974. "Optimal taxation and discount rate for public investment in a growth setting," Journal of Public Economics, Elsevier, vol. 3(3), pages 217-235, August.
    11. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 66(4), pages 545-556.
    12. Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 598-606, May/June.
    13. Christophe Chamley, 1980. "Optimal Intertemporal Taxation and the Public Debt," Cowles Foundation Discussion Papers 554, Cowles Foundation for Research in Economics, Yale University.
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