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A Long-Run, Short-Run and Politico-Economic Analysis of the Welfare Costs of Inflation

This paper assesses the long-run and short-run (i.e. along the transition path) welfare implications of permanent changes in inflation in an environment with essential money and perfectly competitive markets. The model delivers a monetary distribution that matches moments of the distribution seen in the US data. Although there is potential for wealth redistribution to deliver welfare gains from inflation, the (total) costs of 10 percent inflation relative to zero is over 7 percent of consumption. While these results suggest a dominating real-balance effect of inflation, a politico-economic analysis concludes that the prevailing (majority rule) inflation rate is above the Friedman Rule.

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File URL: http://repec.library.villanova.edu/workingpapers/VSBEcon16.pdf
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Paper provided by Villanova School of Business Department of Economics and Statistics in its series Villanova School of Business Department of Economics and Statistics Working Paper Series with number 16.

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Date of creation: Aug 2011
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Handle: RePEc:vil:papers:16
Contact details of provider: Web page: http://www.villanova.edu/business/facultyareas/economics/

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  1. Aleksander Berentsen & Gabriele Camera & Christopher Waller, 2005. "Money, Credit and Banking," CESifo Working Paper Series 1617, CESifo Group Munich.
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  17. Matthias Doepke & Martin Schneider, 2006. "Inflation and the Redistribution of Nominal Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1069-1097, December.
  18. Ruilin Zhou, 1996. "Individual and aggregate real balances in a random matching model," Staff Report 222, Federal Reserve Bank of Minneapolis.
  19. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S176-S215, June.
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