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Inflation, Output, and Welfare in the Laboratory

Author

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  • Janet Hua Jiang
  • Daniela Puzzello
  • Cathy Zhang

Abstract

We develop an experimental framework to investigate the quantity theory of money and the real effects of inflation in an economy where money serves as a medium of exchange. We test the classical view that inflation reduces output and welfare by taxing monetary exchange. Inflation is engineered by constant money growth. We conduct three treatments, where the newly issued money is used to finance government spending, lump-sum transfers, and proportional transfers, respectively. Experimental results largely support theoretical predictions. Higher money growth leads to higher inflation. Output and welfare are significantly lower with government spending, and output is significantly lower with lump-sum transfers, while there are no significant real effects with proportional transfers. A deviation from theory is that the detrimental effect of money growth in our framework depends on the implementation scheme and is stronger with government spending than with lump-sum transfers.

Suggested Citation

  • Janet Hua Jiang & Daniela Puzzello & Cathy Zhang, 2023. "Inflation, Output, and Welfare in the Laboratory," Staff Working Papers 23-11, Bank of Canada.
    • Handle: RePEc:bca:bocawp:23-11
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation and prices; Inflation: costs and benefits; Monetary policy;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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