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Financial Sophistication and the Distribution of the Welfare Cost of Inflation

  • Paola Boel
  • Gabriele Camera

The welfare cost of anticipated inflation is quantified in a calibrated model of the U.S. economy that exhibits tractable equilibrium dispersion in wealth and earnings. Inflation does not generate large losses in societal welfare, yet its impact varies noticeably across segments of society depending also on the financial sophistication of the economy. If money is the only asset, then inflation hurts mostly the wealthier and more productive agents, while those poorer and less productive may even benefit from inflation. The converse holds in a more sophisticated financial environment where agents can insure against consumption risk with assets other than money.

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File URL: http://www.krannert.purdue.edu/programs/phd/Working-paper-series/Year-2009/1222.pdf
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Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1222.

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Length: 52 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:pur:prukra:1222
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