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Welfare Costs of Inflation in a Dynamic Economy with Search Unemployment and Endogenous Growth

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  • Burkhard Heer

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

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 296.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_296

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Keywords: Welfare costs of inflation; money demand; search unemployment; endogenous growth; transistion dynamics;

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References

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  33. repec:fth:simfra:93-03 is not listed on IDEAS
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Citations

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Cited by:
  1. Heer, Burkhard, 2003. "Welfare costs of inflation in a dynamic economy with search unemployment," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(2), pages 255-272, November.
  2. Heer, Burkhard & Schubert, Stefan Franz, 2012. "Unemployment and debt dynamics in a highly indebted small open economy," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(6), pages 1392-1413.
  3. Alok Kumar, 2013. "Inflation, Redistribution, and Real Activities," Department Discussion Papers, Department of Economics, University of Victoria 1302, Department of Economics, University of Victoria.
  4. 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, Elsevier, vol. 35(9), pages 1514-1530, September.
  5. Marcelo Arbex & Dennis O'Dea, 2014. "Networks in labor markets and welfare costs of inflation," Working Papers, University of Windsor, Department of Economics 1401, University of Windsor, Department of Economics.

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