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.
|Date of creation:||Aug 2011|
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|Contact details of provider:|| Web page: http://www.villanova.edu/business/facultyareas/economics/|
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