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How uncertain are the welfare costs of inflation?

  • Bakhshi, Hasan

    (Bank of England)

  • Ben Martin
  • Tony Yates

This paper quantifies some of the general equilibrium costs of inflation for the UK using a shopping-time model. It tests whether money balances tend to a finite number as nominal interest rates tend to zero, and explores how uncertainties about the shape of the money demand curve translate into uncertainties about these welfare costs of inflation. A key uncertainty is the existence of a satiation point for money balances. We show that without observations at nominal interest rates close to zero, the power of satiation tests can be low.

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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 12.

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Date of creation: 29 Aug 2002
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Handle: RePEc:ecj:ac2002:12
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