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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
Date of revision:
Handle: RePEc:ecj:ac2002:12
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  1. G. K. Shaw, 1988. "Keynesian Economics," Books, Edward Elgar, number 406, March.
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  20. Anthony Yates, 1998. "Downward nominal rigidity and monetary policy," Bank of England working papers 82, Bank of England.
  21. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  22. David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
  23. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
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  25. Robert G. King & Alexander L. Wolman, 1996. "Inflation targeting in a St. Louis model of the 21st century," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 83-107.
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  27. 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.
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  29. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
  30. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
  31. Fuhrer, Jeffrey C. & Moore, George R. & Schuh, Scott D., 1995. "Estimating the linear-quadratic inventory model Maximum likelihood versus generalized method of moments," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 115-157, February.
  32. Holman, Jill A, 1998. "GMM Estimation of a Money-in-the-Utility-Function Model: The Implications of Functional Forms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 679-98, November.
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  35. Amemiya, Takeshi, 1974. "The nonlinear two-stage least-squares estimator," Journal of Econometrics, Elsevier, vol. 2(2), pages 105-110, July.
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