An intra-household approach to the welfare costs of inflation

Abstract

The literature on the welfare costs of inflation universally assumes that the many-person household can be treated as a single economic agent. This paper explores what the heterogeneity of the agents in a household might imply for such welfare analyses. First, we show that allowing for a one-person or for a many-person transacting technology impacts the money demand function and, therefore, the welfare costs of inflation. Second, more importantly, we derive sufficient conditions under which welfare assessments which depart directly from the knowledge of the money demand function (as in Lucas, 2000) are robust (invariant) under the number of persons considered in the household. Third, we show that Baileys (1956) partial-equilibrium measure of the welfare costs of inflation can be obtained as a first-order approximation of the general-equilibrium welfare measure derived in this paper using a many-person transacting technology.