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Another attempt to quantify the benefits of reducing inflation

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  • R. Anton Braun

Abstract

This article estimates the benefits of reducing U.S. inflation below its current level when the government simultaneously raises another distortionary tax. Other researchers have suggested that reducing inflation would have fairly large benefits?from 1 to 3 percent of gross domestic product. But that result depends on the unrealistic assumption that the government would replace inflation with a lump-sum tax, one which does not affect people's incentives. If, instead, inflation is replaced with an increase in the labor income tax, then the welfare gains that can be expected from reducing inflation below its current level are much smaller?from one-third to one-half of 1 percent of gross domestic product.

Suggested Citation

  • R. Anton Braun, 1994. "Another attempt to quantify the benefits of reducing inflation," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 18(Fall), pages 17-25.
    • Handle: RePEc:fip:fedmqr:y:1994:i:fall:p:17-25:n:v.18no.4
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    Citations

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    Cited by:

    1. Wen, Jean-Francois & Love, David R. F., 1998. "Evaluating Tax Reforms in a Monetary Economy," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 487-508, July.
    2. Abdulaleem Isiaka & Alexander Mihailov & Giovanni Razzi, 2022. "Distributional Effects of Public Spending and Tax Shocks in Middle-Income Countries: A Panel VAR Approach," Economics Discussion Papers em-dp2022-09, Department of Economics, University of Reading.
    3. De Fiore, Fiorella & Teles, Pedro, 2003. "The optimal mix of taxes on money, consumption and income," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 871-887, May.
    4. Abdulaleem Isiaka & Alexander Mihailov & Giovanni Razzi, 2022. "Reallocating Government Spending to Reduce Income Inequality: Panel Data Evidence from the Middle-Income Countries," Economics Discussion Papers em-dp2022-08, Department of Economics, University of Reading.
    5. Dibooglu, Sel & Kenc, Turalay, 2009. "Welfare cost of inflation in a stochastic balanced growth model," Economic Modelling, Elsevier, vol. 26(3), pages 650-658, May.
    6. Isabel Correia & Pedro Teles, 1999. "The Optimal Inflation Tax," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April.
    7. Daniel L. Thornton, 2000. "Money in a theory of exchange," Review, Federal Reserve Bank of St. Louis, vol. 82(Jan), pages 35-60.
    8. De Gregorio, Jose, 1996. "Inflation, growth, and central banks : theory and evidence," Policy Research Working Paper Series 1575, The World Bank.

    More about this item

    Keywords

    Inflation (Finance);

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