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The welfare cost of inflation in general equilibrium

  • Dotsey, Michael
  • Ireland, Peter

This paper presents a general equilibrium monetary model in which inflation distorts a variety of marginal decisions. Although individually none of the distortions is very large, they combine to yield substantial welfare cost estimates. A sustained 4% inflation like that experienced in the U.S. since 1983 costs the economy the equivalent of 0.41% of output per year when currency is identified as the relevant definition of money and over 1% of output per year when M1 is defined as money. The results illustrate how the traditional, partial equilibrium approach can seriously underestimate the true cost of inflation.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 37 (1996)
Issue (Month): 1 (February)
Pages: 29-47

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Handle: RePEc:eee:moneco:v:37:y:1996:i:1:p:29-47
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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