Inflation uncertainty and the cost of inflation

In this paper we develop a measure of the cost of inflation uncertainty whe re a risk premium can be interpreted as the amount of real consumption that a representative agent is willing to forgo in order to be guaranteed a per fectly anticipated path of inflation. This premium can be calculated based on the estimation of a utility function that takes into account portfolio a djustment costs with respect to money balances and bonds, subject to a budg et constraint that includes the after-tax returns on savings. With Canadian and U.S. data, it is shown that economic agents' preferences are such that the uncertainty of unexpected inflation was not big enough to induce a lar ge premium. JEL Classification: E31.