The Inflation Tax in a Real Business Cycle Model

Abstract

Money is incorporated into a real business cycle model using a cash-in-advance constraint. The model is used to analyze whether the business cycle is different in high-inflation and low-inflation economies and to analyze the impact of variability in the growth rate of money. The welfare cost of the inflation tax is measured and the steady-state properties of high and low inflation economies are compared. The welfare cost of a sustained (10 percent) inflation is estimated to be between 0.11 percent and 0.4 percent of GNP. The features of the business cycle are the same in high and low inflation economies, but the steady-state paths may be quite different. Copyright 1989 by American Economic Association.