The equilibrium in which countries impose cash-in-advance constraints and, as shown in Proposition 3, create positive inflation is inefficient along two dimensions. First, ex post consumption profiles do not sufficiently reflect the taste of individual agents. Ftom the solution of (l)-(2), consumption levels are not state contingent since monetary holdings are determined prior to the taste shock.
Second, there is positive inflation which, as we show in this section, is an undesirable outcome of the interaction between governments each attempting to reap positive gains for its citizens by money creation. While inflation is individually rational, in equilibrium, these policies lead to a welfare loss fully.