The Costs and Benefits of Inflation: Evaluation for Japan's Economy

This paper quantitatively evaluates a steady-state inflation rate that is considered desirable from the perspective of social welfare, using a model describing the Japanese economy. Specifically, it begins by setting out points concerning the costs and benefits that accompany inflation. We build a model capable of evaluating the effects, on social welfare, of several of these points: the opportunity cost of holding money, the zero lower bound on nominal interest rates, price stickiness and the downward wage rigidity. Building on this, we conduct a stochastic simulation that quantitatively evaluates the social loss with different steady-state inflation rates. We also analyze the range of changes in the steady-state inflation rate that minimizes the social loss when we change the model settings.