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Author:Burdick, Clark A. 

Working Paper
A transitional analysis of the welfare cost of inflation

This paper applies new computational methods for studying nonstationary dynamics to reevaluate the welfare cost of inflation. A dynamic stochastic general equilibrium model with heterogeneous agents is studied. Incomplete markets induce agents to hold a fiat currency as insurance against idiosyncratic income fluctuations. Rather than comparing steady state equilibria, I measure the welfare cost of inflation by explicitly modeling the transitional dynamics that arise following a change in monetary policy. Transitional dynamics are shown to increase the welfare cost of inflation substantially. ...
FRB Atlanta Working Paper , Paper 97-15

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