The Welfare Costs of Inflation in a Micro-Founded Macroeconometric Model
AbstractThis 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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Bibliographic InfoPaper provided by North Carolina State University, Department of Economics in its series Working Paper Series with number 013.
Length: 31 pages
Date of creation: Jul 2007
Date of revision:
Bayesian Estimation; DSGE; Inflation; Welfare; Transtional Dynamics;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-07-13 (All new papers)
- NEP-CBA-2007-07-13 (Central Banking)
- NEP-DGE-2007-07-13 (Dynamic General Equilibrium)
- NEP-MAC-2007-07-13 (Macroeconomics)
- NEP-MON-2007-07-13 (Monetary Economics)
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