The welfare cost of inflation: a critique of Bailey and Lucas
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.
Volume (Year): (1999)
Issue (Month): Jan ()
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- Robert G. King & Alexander L. Wolman, 1996.
"Inflation Targeting in a St. Louis Model of the 21st Century,"
NBER Working Papers
5507, National Bureau of Economic Research, Inc.
- 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.
- Robert G. King & Alexander L. Wolman, 1996. "Inflation targeting in a St. Louis model of the 21st century," Review, Federal Reserve Bank of St. Louis, issue May, pages 83-107.
- Robert G. King & Alexander L. Wolman, 1996. "Inflation targeting in a St. Louis model of the 21st century," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 83-107.
- 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.
- 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.
- Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280.
- 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.
- 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 128-38, March.
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