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Economic Development and the Welfare Costs of Inflation It has been widely observed that the role of money in the ?nancial system varies across developing and advanced countries. While the connections between economic development and the e¤ects of monetary policy on macroeconomic outcomes appear to be well understood, their consequences for living standards across the world are not. That is, existing research on the welfare costs of in?ation has focused nearly ex- clusively on the United States. In contrast to the existing literature, this paper seeks to determine the gains from eliminating in?ation across a broad section of countries. These countries vary according to their: (i) level of economic development, (ii) re- liance on cash for transactions, and (iii) average in?ation rates. Upon calibrating our model to quantify the role of money for transactions in the economy, we ?nd that there are substantial di¤erences in welfare costs across countries. Notably, the welfare costs of in?ation in advanced countries such as the United States are quite low. In particular, the cost of in?ation in countries such as Germany and the United States may be as low as 0.3%. However, the gains from eliminating in?ation in the developing world are much higher. Di¤erences in total factor productivity promote capital accumulation and reduce the reliance on cash in advanced countries so that the e¤ective tax rate on capital formation is mitigated

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  • TINA M. Edgar A. Ghossoub

    (The University of Texas at San Antonio)

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    File URL: http://business.utsa.edu/wps/eco/0034ECO-566-2012.pdf
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    Paper provided by College of Business, University of Texas at San Antonio in its series Working Papers with number 0034.

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    Length: 13 pages
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    Handle: RePEc:tsa:wpaper:0014

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    Keywords: Economic Development; Financial Development; In?ation;

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