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On the Infinite Welfare Cost of Inflation and Other Second Order Effects

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  • Christophe Chamley

Abstract

The optimal inflation rate is analyzed in a simple model of intertemporal general equilibrium where agents have an operative bequest motive and taxation is distortionary. Monetary balances are used as a productive input, and agents have perfect foresight. The optimal value of the permanent inflation rate can be approximated by a simple formula. The case in which the growth of aggregate income exceeds the social discount rate is unlikely to be important, and the optimal value of the permanent inflation rate depends on the existence of a short-run trade-off between unemployment and inflation.

Suggested Citation

  • Christophe Chamley, 1981. "On the Infinite Welfare Cost of Inflation and Other Second Order Effects," Cowles Foundation Discussion Papers 598, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:598
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    References listed on IDEAS

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