The welfarecostsofexpectedandunexpectedinflation

The monetarysearchmodelby Lagos andWright(2005) is extendedwithimperfect informationaboutnominalshocksasin Lucas (1972). Ananalyticalsolutionexistswith logarithmicpreferences.Ingeneral,individualsholdprecautionarybalances.Calibrated to UnitedStatespostwardata,thewelfarecostofthemonetarycycleiscalculatedtobe small(below0.0003%ofGDP)comparedtothewelfarecostoftheinflationtax(around 0.25%ofGDP).Themainreasonfortheminutewelfarecostofthemonetarycycleisits low amplitudein1947–2007.But,monetarycrashes,suchasthoseexperiencedduring theGreatDepression,cangenerateimportantwelfarecosts