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The Welfare Costs of Inflation in a Micro-Founded Macroeconometric Model

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  • Pablo A. Guerron

    ()
    (Department of Economics, North Carolina State University)

Abstract

This paper computes the welfare costs of inflation in an estimated dynamic stochastic general equilibrium model of the U.S. economy. Both steady state and transitional welfare results are reported. I find that a 10 percent inflation entails a steady state welfare cost of 1.9 % of annual consumption. Taking into account trasitional effects, the cost drops to 1.2%. Under some circumstances, the transitional effects can erase most of the steady state welfare losses. The role of nominal frictions such as price/wage sluggishness as well as that of uncertainty are also addressed.

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File URL: ftp://ftp.ncsu.edu/pub/ncsu/economics/RePEc/pdf/welcost.pdf
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Bibliographic Info

Paper provided by North Carolina State University, Department of Economics in its series Working Paper Series with number 013.

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Length: 31 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:ncs:wpaper:013

Note: First draft 2007-06
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Related research

Keywords: Bayesian Estimation; DSGE; Inflation; Welfare; Transtional Dynamics;

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