Uncertainty, Inflation, and Welfare

Jonathan Chiu and Miguel Molico

Staff Working Papers from Bank of Canada

Abstract: This paper studies the welfare costs and the redistributive effects of inflation in the presence of idiosyncratic liquidity risk, in a micro-founded search-theoretical monetary model. We calibrate the model to match the empirical aggregate money demand and the distribution of money holdings across households, and study the effects of inflation under the implied degree of market incompleteness. We show that in the presence of imperfect insurance the estimated long-run welfare costs of inflation are on average 40% smaller compared to a complete markets, representative agent economy, and that inflation induces important redistributive effects across households. For example, the welfare gains of reducing inflation from 10% to 0% is 0.59% of income. Furthermore, we estimate that the long-run welfare gains of reducing the typical current inflation target of 2 to 1 percent to be 0.06% of income.

Keywords: Inflation: costs and benefits; Monetary policy framework (search for similar items in EconPapers)
JEL-codes: E40 E50 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ias, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Related works:
Journal Article: Uncertainty, Inflation, and Welfare (2011)
Journal Article: Uncertainty, Inflation, and Welfare (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:08-13

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