Liquidity,redistribution,andthewelfarecostofinflation$

The long-runwelfarecostsofinflationarestudiedinamicro-foundedmodelwith tradingfrictionsandcostlyliquiditymanagement.Bymodellingtheliquiditymanage- mentdecision,themodelendogenizestheresponsesofvelocity,output,thedegreeof marketsegmentation,andthedistributionofmoney.Comparedtothetraditional estimatesbasedonarepresentativeagentmodel,thewelfarecostsofinflationare significantlysmallerduetodistributionaleffectsofinflation.Thewelfarecostof increasinginflationfrom0%to10%is0.62%ofconsumptionfortheUSeconomy. Furthermore,thewelfarecostisgenerallynon-linearintheinflationrate