Inflation, welfare, and the time-costs of transacting

The costs of inflation are assessed using an endogenous growth macroeconomi c model in which money reduces the time-costs of transacting. Inflation red uces growth in the model, which supports recent empirical evidence. Althoug h simulations show time-costs to be small, inflation raises these costs and affects consumption, employment, and growth margins, implying greater welf are losses than generally found in the literature. We estimate welfare gain s of 2 per cent of GNP for reductions in inflation rates from 5 per cent to zero when seignorage revenues are replaced with distortional taxes. Optima l inflation rates are negative.