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The Inflation Tax in a Real Business Cycle Model

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  • Thomas F. Cooley

    (UCLA)

  • Gary D. Hansen

    (University of Rochester)

Abstract

Money is incorporated into a real business cycle model using a cash-in-advance constraint. The model is used to analyze whether the business cycle is different in high-inflation and low-inflation economies and to analyze the impact of variability in the growth rate of money. The welfare cost of the inflation tax is measured and the steady-state properties of high and low inflation economies are compared. The welfare cost of a sustained (10 percent) inflation is estimated to be between 0.11 percent and 0.4 percent of GNP. The features of the business cycle are the same in high and low inflation economies, but the steady-state paths may be quite different. Copyright 1989 by American Economic Association.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Paper provided by UCLA Department of Economics in its series UCLA Economics Working Papers with number 496.

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Date of creation: 01 Dec 1987
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Handle: RePEc:cla:uclawp:496

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Web page: http://www.econ.ucla.edu/

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References

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  1. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report 102, Federal Reserve Bank of Minneapolis.
  2. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-44, October.
  3. Lucas, Robert E., 1981. "Discussion of : Stanley Fischer, "towards an understanding of the costs of inflation: II"," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 43-52, January.
  4. Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 283-308, November.
  5. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  6. Martin Eichenbaum & Kenneth I. Singleton, 1986. "Do Equilibrium Real Business Cycle Theories Explain Postwar U.S. Business Cycles?," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 91-146 National Bureau of Economic Research, Inc.
  7. Greenwood, Jeremy & Huffman, Gregory W., 1987. "A dynamic equilibrium model of inflation and unemployment," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 203-228, March.
  8. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
  9. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  10. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-80, June.
  11. Danthine, Jean-Pierre & Donaldson, John B. & Smith, Lance, 1987. "On the superneutrality of money in a stochastic dynamic macroeconomic model," Journal of Monetary Economics, Elsevier, vol. 20(3), pages 475-499, December.
  12. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
  13. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  14. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  15. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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  1. Advanced Monetary Theory and Policy (ECON 447)

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