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A Long-Run, Short-Run and Politico-Economic Analysis of the Welfare Costs of Inflation

Scott Dressler ()

No 16, Villanova School of Business Department of Economics and Statistics Working Paper Series from Villanova School of Business Department of Economics and Statistics

Abstract: 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.

Keywords: Inflation; Welfare; Transitions; Voting (search for similar items in EconPapers)
JEL-codes: E40 E50 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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http://repec.library.villanova.edu/workingpapers/VSBEcon16.pdf (application/pdf)

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Working Paper: A Long-run, Short-run, and Politico-Economic Analysis of the Welfare Costs of Inflation (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:vil:papers:16

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