The Welfare Costs of Inflation in Competitive Markets: a Long-Run and Politico -Economic Analysis

Scott Dressler ()

No 955, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: This paper examines the welfare cost of inflation in an environment where money is essential and agents exchange in perfectly-competitive, Walrasian markets. A Walrasian market delivers a non-degenerate distribution of money holdings across agents while avoiding some of the computational difficulties associated with search-theoretic, monetary environments. The model is calibrated to long-run US velocity as well as the median amount of liquid asset holdings in the US, and has the potential to assess the total, long-run welfare costs as well as how they are distributed across the population. Since the welfare costs of inflation are well known to vary across the distribution of money holdings, this paper also asks which inflation rate would prevail in an economy where the decision was left to the median voter.

Date: 2011
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