Feldstein (1997, 1999) provides a quantitative assessment of the benefits of price stability based on the interaction of inflation and the tax system, showing that a lower average inflation rate stimulates investment by reducing the effective tax on capital income. 6  Because real money balances bear no interest, the opportunity cost of holding them is the nominal rate of interest.
Higher inflation then leads to higher nominal interest rates, and hence lowers real balances, which causes a welfare loss because the social cost of producing real balances has remained substantially unaffected. In the absence of other frictions in the economy, inflation is viewed in this class of models as a tax on real balances (Bailey, 1956; Friedman 1969).