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Another attempt to quantify the benefits of reducing inflation

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  • R. Anton Braun

Abstract

This article estimates the benefits of reducing U.S. inflation below its current level when the government simultaneously raises another distortionary tax. Other researchers have suggested that reducing inflation would have fairly large benefits—from 1 to 3 percent of gross domestic product. But that result depends on the unrealistic assumption that the government would replace inflation with a lump-sum tax, one which does not affect people's incentives. If, instead, inflation is replaced with an increase in the labor income tax, then the welfare gains that can be expected from reducing inflation below its current level are much smaller—from one-third to one-half of 1 percent of gross domestic product.

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Bibliographic Info

Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1994)
Issue (Month): Fall ()
Pages: 17-25

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Handle: RePEc:fip:fedmqr:y:1994:i:fall:p:17-25:n:v.18no.4

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Related research

Keywords: Inflation (Finance);

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Cited by:
  1. De Fiore, Fiorella & Teles, Pedro, 2002. "The optimal mix of taxes on money, consumption and income," Working Paper Series 0135, European Central Bank.
  2. De Gregorio, Jose, 1996. "Inflation, growth, and central banks : theory and evidence," Policy Research Working Paper Series 1575, The World Bank.
  3. Dibooglu, Sel & Kenc, Turalay, 2009. "Welfare cost of inflation in a stochastic balanced growth model," Economic Modelling, Elsevier, vol. 26(3), pages 650-658, May.
  4. Isabel Correia & Pedro Teles, 1999. "The Optimal Inflation Tax," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April.
  5. Wen, J.F. & Love, D.R.F., 1996. "Evaluating Tax Reforms in a Monetary Economy," Working Papers 96005, Wilfrid Laurier University, Department of Economics.

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