Liquidity, redistribution, and the welfare cost of inflation

Jonathan Chiu and Miguel Molico

Journal of Monetary Economics, 2010, vol. 57, issue 4, 428-438

Abstract: The long-run welfare costs of inflation are studied in a micro-founded model with trading frictions and costly liquidity management. By modelling the liquidity management decision, the model endogenizes the responses of velocity, output, the degree of market segmentation, and the distribution of money. Compared to the traditional estimates based on a representative agent model, the welfare costs of inflation are significantly smaller due to distributional effects of inflation. The welfare cost of increasing inflation from 0% to 10% is 0.62% of consumption for the US economy. Furthermore, the welfare cost is generally non-linear in the inflation rate.

Keywords: Inflation; Monetary; policy; Search; Welfare (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (79)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304-3932(10)00036-X
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Liquidity, Redistribution, and the Welfare Cost of Inflation (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:57:y:2010:i:4:p:428-438

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().