A long-run, short-run, and politico-economic analysis of the welfare costs of inflation

Scott Dressler

Journal of Macroeconomics, 2016, vol. 47, issue PB, 255-269

Abstract: The long-run, short-run, and politico-economic welfare implications of inflation are assessed in a Bewley model of money demand. All agents produce and consume every period, and hold money to self-insure against idiosyncratic risk. The model is calibrated so the equilibrium monetary distribution shares features with US data. The long-run welfare costs of inflation are shown to be large because inflation reduces the ability of money to mitigate risk. However, the beneficial redistributive effect of inflation is magnified along the short-run transition and reduces the overall costs. These short-run benefits result in a majority-rule inflation rate above the Friedman Rule.

Keywords: Inflation; Welfare; Transitions; Voting (search for similar items in EconPapers)
JEL-codes: E40 E50 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:47:y:2016:i:pb:p:255-269

DOI: 10.1016/j.jmacro.2015.10.011

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