THE WELFARE COST OF INFLATION UNDER IMPERFECT INSURANCE

This paper examines the welfare cost of inflation in an economy where agents hold money in order to smooth consumption in the face of income variability for which there is no insurance. The findings indicate that, for the type of economies considered here, the area under the empirical money demand curve is a poor measure of the welfare cost of inflation. This area accounts for only one-fourth of the true costs in the case of 5% inflation. © 1992.