The Welfare Cost of Inflation in a Steady State: An Application of Various Utility Functions in the Sidrauski Model

The economic literature shows that the increase in the level of inflation can affect the economic welfare through different ways and cause a loss of well-being in the society. Therefore, considering the importance of measuring the welfare cost of inflation, in this study based on neoclassical model and various utility functions in the Sidrauski model in the framework of an equilibrium model, we investigate the steady state path of the welfare cost of inflation based on the parameters in Iran's economy. The findings of this research show that in all three scenarios based on the linear utility function, the Lucas utility function and CES utility function, the increase in inflation leads to the loss of household consumption in the equilibrium state and as a result the welfare cost increase. But when inflation is at Friedman's optimal level or zero rate, the welfare cost of inflation is very small or close to zero. Also, other results of this research show that an increase in the level of inflation, in addition to an increase in the welfare cost of inflation, will lead to a decrease in the equilibrium level of household utility, as well as a decrease in the real balance of money and an increase in the inflation tax in the economy. Other findings of this research show that in the 90s in Iran's economy, when we have seen the highest growth in the price level in the period after the revolution, in all the existing scenarios, the welfare costs of inflation were significantly at the highest level. Therefore, monetary and financial policymakers are advised to always pay special attention to the role of inflation in reducing economic well-being in the implementation of their policies and measure the potential losses caused by deviation from Friedman's rule and zero inflation rate and put policy solutions to reduce these losses on the agenda.