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The Inflation Tax In A Real Business Cycle Model

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Author Info

  • COOLEY, T.F.
  • HANSEN, G.D.

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.

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Bibliographic Info

Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 155.

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Length: 32 pages
Date of creation: 1988
Date of revision:
Handle: RePEc:roc:rocher:155

Contact details of provider:
Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

Related research

Keywords: business cycles ; inflation ; money ; economic models ; employment;

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References

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  1. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  2. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  3. 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.
  4. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
  10. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  11. Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 283-308, November.
  12. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
  13. 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.
  14. 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.
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