IDEAS home Printed from
   My bibliography  Save this article

The welfare cost of inflation: a critique of Bailey and Lucas


  • Alvin L. Marty


Estimating the welfare gains from ending inflation requires taking a stand on the shape of the money demand function. A form of the money demand function that seems to describe U.S. experience - known in technical jargon as the double log form - seems to work well in countries and times where inflation was moderate. In this article, Alvin Marty argues that the double log form would not likely work well in extreme cases, where policy was set to achieve Milton Friedman's optimal money stock, or at the other extreme, hyperinflation. The author concludes that this simple functional form should not be used to calculate the welfare gains associated with implementing the optimal policy.

Suggested Citation

  • Alvin L. Marty, 1999. "The welfare cost of inflation: a critique of Bailey and Lucas," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 41-46.
  • Handle: RePEc:fip:fedlrv:y:1999:i:jan:p:41-46:n:1

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Marty, Alvin L., 1976. "A note on the welfare cost of money creation," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 121-124, January.
    2. King, Robert G. & Wolman, Alexander L., 2013. "Inflation Targeting in a St. Louis Model of the 21st Century," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 543-574.
    3. Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 598-606, May/June.
    4. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-138, March.
    5. Robert E. Lucas, Jr., 1994. "On the welfare cost of inflation," Working Papers in Applied Economic Theory 94-07, Federal Reserve Bank of San Francisco.
    6. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280-280.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Cysne, Rubens Penha, 2002. "A note on the integrability of partial-equilibrium measures of the welfare costs of inflation," Journal of Banking & Finance, Elsevier, vol. 26(12), pages 2357-2363.
    2. Cysne, Rubens Penha, 2011. "The n-dimensional Bailey–Divisia measure as a general-equilibrium measure of the welfare costs of inflation," Economics Letters, Elsevier, vol. 113(2), pages 99-102.
    3. Zhao, Liuyan, 2017. "The behavior of money demand in the Chinese hyperinflation," China Economic Review, Elsevier, vol. 42(C), pages 145-154.
    4. Zhao, Liuyan & Li, Lianfa, 2015. "Interest rate, money demand and seigniorage: The Chinese hyperinflation 1946–1949," China Economic Review, Elsevier, vol. 34(C), pages 169-179.

    More about this item


    Money supply ; Inflation (Finance);


    This item is featured on the following reading lists or Wikipedia pages:
    1. Advanced Monetary Theory and Policy (ECON 447)


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedlrv:y:1999:i:jan:p:41-46:n:1. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kathy Cosgrove). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.