How uncertain are the welfare costs of inflation?

Abstract

This paper quantifies some of the general equilibrium costs of inflation for the UK using a shopping-time model. It tests whether money balances tend to a finite number as nominal interest rates tend to zero, and explores how uncertainties about the shape of the money demand curve translate into uncertainties about these welfare costs of inflation. A key uncertainty is the existence of a satiation point for money balances. We show that without observations at nominal interest rates close to zero, the power of satiation tests can be low.