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Welfare costs of inflation in a dynamic economy with search unemployment

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  • Heer, Burkhard

Abstract

Recent work on money and endogenous growth finds modest welfare costs of inflation. Furthermore, high inflation reduces the growth rate. We present a monetary endogenous growth model with labor market frictions in the form of search unemployment which is calibrated for the US economy. Interestingly, both employment and the growth rate may even increase with the rate of inflation depending on the elasticity of labor supply. Considering the transition dynamics following a change in the monetary policy, the optimal quarterly inflation rate is found to amount to approximately 3.5% in the benchmark case. A reduction of the inflation rate from its optimal value to zero results in a welfare loss equal to 0.3% of total consumption.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 28 (2003)
Issue (Month): 2 (November)
Pages: 255-272

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Handle: RePEc:eee:dyncon:v:28:y:2003:i:2:p:255-272

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References

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Citations

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Cited by:
  1. Heer, Burkhard & Schubert, Stefan Franz, 2012. "Unemployment and debt dynamics in a highly indebted small open economy," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1392-1413.
  2. Schubert, Stefan F., 2011. "The effects of total factor productivity and export shocks on a small open economy with unemployment," Journal of Economic Dynamics and Control, Elsevier, vol. 35(9), pages 1514-1530, September.
  3. Burkhard Heer, 2000. "Welfare Costs of Inflation in a Dynamic Economy with Search Unemployment and Endogenous Growth," CESifo Working Paper Series 296, CESifo Group Munich.
  4. Alok Kumar, 2013. "Inflation, Redistribution, and Real Activities," Department Discussion Papers 1302, Department of Economics, University of Victoria.

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