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Title:Uncertainty, inflation, and welfare PDF Logo
Authors:Chiu, Jonathan
Molico, Miguel
Issue Date:2008
Series/Report no.:Bank of Canada Working Paper 2008,13
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.
Subjects:Inflation: costs and benefits
Monetary policy framework
JEL:E40
E50
Document Type:Working Paper
Appears in Collections:Bank of Canada Working Papers

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