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Inflation, Welfare, and the Time-Costs of Transacting

Author

Listed:
  • David R.F. Love
  • Jean-Francois Wen

Abstract

The costs of inflation are assessed using an endogenous growth macroeconomic model in which money reduces the time-costs of transacting. Inflation reduces growth in the model, which supports recent empirical evidence. Although simulations show time-costs to be small, inflation raises these costs and affects consumption, employment, and growth margins, implying greater welfare losses than generally found in the literature. The authors estimate welfare gains of 2 percent of GNP for reductions in inflation rates from 5 percent to zero when seignorage revenues are replaced with distortional taxes. Optimal inflation rates are negative.

Suggested Citation

  • David R.F. Love & Jean-Francois Wen, 1999. "Inflation, Welfare, and the Time-Costs of Transacting," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 171-194, February.
    • Handle: RePEc:cje:issued:v:32:y:1999:i:1:p:171-194
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    Cited by:

    1. Gillman, Max & Otto, Glenn, 2003. "Money demand in a banking time economy," HWWA Discussion Papers 254, Hamburg Institute of International Economics (HWWA).
    2. Gillman, Max & Kejak, Michal & Valentinyi, Akos, 1999. "Inflation, Growth, and Credit Services," Transition Economics Series 13, Institute for Advanced Studies.
    3. Max Gillman & Michal Kejak, 2005. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," Economic Journal, Royal Economic Society, vol. 115(500), pages 247-270, January.
    4. Shouyong Shi & Mariana Rojas Breu & Aleksander Berentsen, 2009. "Liquidity and Growth," 2009 Meeting Papers 590, Society for Economic Dynamics.
    5. Walter A. de Wet, 2003. "Thinking Like A Governor," South African Journal of Economics, Economic Society of South Africa, vol. 71(4), pages 792-805, December.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D6 - Microeconomics - - Welfare Economics

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