In This Issue Federal Reserve Bank of Minneapolis Quarterly Review Vol. The Costs of Inflation . . . Standard economic analyses of inflation start with the notion that it is a tax on money holdings.
Inflation is no exception.
As a tax, it distorts the decision of how much money to hold. Most analyses of the inflation tax try to weigh the costs from the distortions against the benefits from the revenues. Most of these analyses also conclude, however, that the net costs to exceeding that best rate are fairly small. Ayse Imrohoroglu and Edward C. Prescott take a slightly different approach and come to a quite different conclusion. In fact, with this model, Imrohoroglu and Prescott find that the real interest rate is what matters most for economic welfare.