In countries with chronically high inflation rates, the inflation tax is an important source of revenue. A closer look at the welfare costs of inflation A. Height of real money demand curve is a proxy for incremental value to consumers of real money balances. B. Compare real money demand at zero inflation and at a positive inflation rate. A zero nominal interest rate implies a deflation rate equal to the real interest rate. Friedman rule not optimal.
All taxes are distortionary.
Social optimality implies that the marginal welfare loss associated with each tax be equal. Inflation tax should be included in government s revenue mix.