Going from low inflation to price stability involves a short term loss (associated with the" higher unemployment rate required to reduce the inflation) and results in a series of welfare gains" in all future years. The primary source of these gains is the reduction in the distortions that result" from the interaction of tax rules and inflation. The paper quantifies the gains associated with" reducing the distortion in favor of current consumption rather than future consumption and in" favor of the consumption of owner occupied housing. These tax effects are much larger than the" effect on the demand for money that is generally emphasized in studies of the distorting effect of" inflation. The seignorage gains are also small in comparison to other effects of the tax-inflation" interaction. The estimates imply that the annual value of the net benefits of going from two" percent inflation to price stability are about one percent of GDP. Discounting this growing" stream of benefits at a real discount rate of five percent implies a net present value of about more" than 30 percent of GDP. All estimates of the short-run cost of going from low inflation to price" stability are less than this.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6200.
Length: Date of creation: Sep 1997 Date of revision: Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER. Handle: RePEc:nbr:nberwo:6200
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Find related papers by JEL classification: E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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