The costs of inflation are assessed using an endogenous growth macroeconomic model
in which money reduces the time-costs of transacting. Inflation reduces growth in
the model, which supports recent empirical evidence. Although simulations show time-costs
to be small, inflation raises these costs and affects consumption, employment, and
growth margins, implying greater welfare losses than generally found in the literature.
The authors estimate welfare gains of 2 percent of GNP for reductions in inflation
rates from 5 percent to zero when seignorage revenues are replaced with distortional
taxes. Optimal inflation rates are negative.