Welfare Cost of (Low) Inflation: A General Equilibrium Perspective
AbstractThis paper provides general equilibrium estimates of the steady-state welfare gains of lowering inflation from a low level to close to price stability, using an overlapping-generations growth model. Money demand is modeled on the basis that real money balances are a factor of production. Assuming a standard Fisher equation modified by the presence of an income tax, it is found that inflation unambiguously reduces capital intensity, drives up the before-tax real rate of return to capital, and unambiguously imposes a life-time welfare cost. This welfare cost is, however, quantitatively very modest (under 0.2 percent of GDP annually) within reasonable ranges of all parameter values.
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Bibliographic InfoArticle provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.
Volume (Year): 57 (2000)
Issue (Month): 4 (August)
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Other versions of this item:
- Howell H. Zee, 1998. "Welfare Cost of (Low) Inflation - A General Equilibrium Perspective," IMF Working Papers 98/111, International Monetary Fund.
- D9 - Microeconomics - - Intertemporal Choice and Growth
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- H6 - Public Economics - - National Budget, Deficit, and Debt
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