Some Costs and Benefits of Price Stability in the United Kingdom
AbstractIn a previous attempt to articulate the costs of inflation (Leigh-Pemberton (1992)), the Bank of England outlined the following costs of a fully-anticipated inflation: - the cost of economising on real money balances -- so-called shoe-leather' effects; - the costs of operating a less-than-perfectly indexed tax system; - the costs of front-end loading' of nominal debt contracts; - the cost of constantly revising price lists -- so called menu costs' Feldstein (1996) quantified the first two of these costs when moving from 2% inflation to price stability in the U.S. Feldstein concluded that the permanent welfare gains through these two channels -- suitably discounted -- alone exceeded the transient costs of doing so. This paper aims to replicate Feldstein's analysis for the U.K. Welfare effects are quantified using deadweight loss analysis familiar from public finance economics. Because inflation exacerbates tax distortions that exist even without inflation, the welfare costs are trapezoids rather than the usual triangles, or, alternatively, first-order rather than second-order losses. We find that the welfare gains from moving to price stability through the two channels identified above are lower in
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6660.
Date of creation: Jul 1998
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Publication status: published as The Costs and Benefits of Price Stability. Feldstein, Martin, ed., Chicago: The University of Chicago Press, 1999, pp. 133-180.
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- hasan bakhshi & Andrew Haldane & Neal Hatch, 1999. "Some Costs and Benefits of Price Stability in the United Kingdom," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 133-198 National Bureau of Economic Research, Inc.
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