Estimates of the Variance of U. S. Inflation Based upon the ARCH Model

IT IS GENERALLY AGREED that the unpredictability of future inflation is a major component of the welfare loss associated with inflation. Perfectly predicted inflation might induce some costs through institutional rigidities, governmental interference, and transaction costs, but, in the long run, these should be rather minimal as these institutions adopt various forms of indexing. When inflation is unpredictable, risk averse economic agents will...