Real Interest Rates as a Measure of Welfare in an Economy with Incentive Constraints
In this paper, we study the relationship between welfare and real interest rates in Aiyagari and Williamson's (2000) setting. They developed a dynamic insurance contract model with an incomplete market monetary economy and demonstrated that the optimal inflation rate is positive. This paper investigates the relationship between real interest rates and welfare in their model with more precise measures of inflation around the optimal inflation rate. Our numerical results demonstrate that real interest rates and welfare have a positive correlation and suggest that real interest rates can serve as a measure of welfare.
Volume (Year): 50 (2009)
Issue (Month): 1 (June)
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