The Welfare Cost of Inflation in OECD Countries

Abstract

The welfare cost of anticipated inflation is quantified in a matching model of money calibrated to twenty-three different OECD countries for several sample periods. In most economies, given the common period 1978-1998, a representative agent would give up only a fraction of 1% of consumption to avoid 10% inflation. The welfare cost of inflation varies across countries, from a fraction of 0.1% in Japan, to more than 2% in Australia, reaching 6% with bargaining. The model fits poorly money demand data of several countries, however. The fit generally improves with longer sample periods. The results are fairly robust to variations in choice of calibrated parameters and calibration targets.

Keywords: Money, Friedman rule, Trade Frictions

JEL Classification: E4, E5