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

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  • Scott J. Dressler

    (Villanova University)

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.

Suggested Citation

  • Scott J. Dressler, 2011. "The Welfare Costs of Inflation in Competitive Markets: a Long-Run and Politico -Economic Analysis," 2011 Meeting Papers 955, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:955
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    References listed on IDEAS

    as
    1. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, August.
    2. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    3. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
    4. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
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