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On the Welfare Cost of Inflation: The Case of Pakistan

  • Siffat Mushtaq

    (International Islamic University, Islamabad)

  • Abdul Rashid

    (International Islamic University, Islamabad)

  • Abdul Qayyum

    (Pakistan Institute of Development Economics, Islamabad)

In this paper, we quantify welfare costs of inflation for Pakistan for the period 1960-2007 using semi-log and double-log money demand functions. We find that the welfare gain of moving from positive inflation to zero inflation is approximately the same under both money demand specifications but the behaviour of the two models is fairly different towards low interest rates. Moving from zero inflation to zero nominal interest rate has a substantial gain under double-log form compared to the semi-log function. The compensating variation approach for the semi-log model gives higher welfare loss figures compared to Bailey’s approach. However, the two approaches yield approximately the same welfare cost of inflation for the double-log specification.

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File URL: http://www.pide.org.pk/pdf/PDR/2012/Volume1/61-96.pdf
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Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 51 (2012)
Issue (Month): 1 ()
Pages: 61-96

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Handle: RePEc:pid:journl:v:51:y:2012:i:1:p:61-96
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  1. Max Gillman, 1995. "Comparing Partial And General Equilibrium Estimates Of The Welfare Cost Of Inflation," Contemporary Economic Policy, Western Economic Association International, vol. 13(4), pages 60-71, October.
  2. Cooley, T.F. & Hansen, G.D., 1991. "The Welfare Costs of Moderate Inflations," Papers 90-04, Rochester, Business - General.
  3. Tower, Edward, 1971. "More on the Welfare Cost of Inflationary Finance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(4), pages 850-60, November.
  4. Qayyum, Abdul, 2005. "Modelling the Demand for Money in Pakistan," MPRA Paper 2057, University Library of Munich, Germany, revised 2005.
  5. Mohsin S. Khan & Axel Schimmelpfennig, 2006. "Inflation in Pakistan; Money or Wheat?," IMF Working Papers 06/60, International Monetary Fund.
  6. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  7. Abdul Qayyum, 2000. "Demand for Real Money Balances by the Business Sector: An Econometric Investigation," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 39(4), pages 857-873.
  8. Martha López, . "Seigniorage and the Welfare Cost of Inflation in Colombia," Borradores de Economia 151, Banco de la Republica de Colombia.
  9. Abdul Qayyum, 2006. "Money, Inflation, and Growth in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(2), pages 203-212.
  10. Abdul Qayyum, 2001. "Sectoral Analysis of the Demand for Real Money Balances in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(4), pages 953-966.
  11. Barro, Robert J, 1972. "Inflationary Finance and the Welfare Cost of Inflation," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 978-1001, Sept.-Oct.
  12. Bali, Turan G., 2000. "U.S. money demand and the welfare cost of inflation in a currency-deposit model," Journal of Economics and Business, Elsevier, vol. 52(3), pages 233-258.
  13. Qayyum, Abdul, 1998. "Error Correction Model of the Demand for Money in Pakistan," MPRA Paper 2582, University Library of Munich, Germany, revised 1998.
  14. Syed Muhammad Tariq & Kent Matthews, 1997. "The Demand for Simple-sum and Divisia Monetary Aggregates for Pakistan: A Cointegration Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 36(3), pages 275-291.
  15. Mohsin S. Khan & Axel Schimmelpfennig, 2006. "Inflation in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(2), pages 185-202.
  16. Rana Ejaz Ali Khan & Qazi Muhammad Adnan Hye, 2013. "Financial liberalization and demand for money: a case of Pakistan," Journal of Developing Areas, Tennessee State University, College of Business, vol. 47(2), pages 175-198, July-Dece.
  17. Gillman, Max, 1993. "The welfare cost of inflation in a cash-in-advance economy with costly credit," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 97-115, February.
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