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Measuring the Welfare Costs of Inflation in a Life-cycle Model

Paul Gomme ()

No 12008, Working Papers from Concordia University, Department of Economics

Abstract: In a neoclassical growth model with life-cycle households in which money is held to satisfy a cash-in-advance constraint, the optimal steady state inflation rate is not the Friedman rule -- it is in excess of $20\%$. Lump-sum, age-independent money injections twist and flatten the lifetime profile of utility, making this profile look more like the one that would be chosen by a planner. The cost of monetary finance of lump-sum payments is the distortion introduced to the labor-leisure choice.

Keywords: monetary policy; inflation; welfare costs; life-cycle model (search for similar items in EconPapers)
JEL-codes: E52 E31 E32 D58 D91 (search for similar items in EconPapers)
Date: 2012-07
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http://paulgomme.github.io/life-cycle-money-revised.pdf (application/pdf)

Related works:
Journal Article: Measuring the welfare costs of inflation in a life-cycle model (2015) Downloads
Working Paper: Measuring the Welfare Costs of Inflation in a Life-cycle Model (2008) Downloads
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