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Bailey's rule for the welfare of inflation: a theoretical foundation

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  • Pessôa, Samuel de Abreu

Abstract

This paper demonstrates that for a very general class of monetary models (the Sidrauski type models and the cash-in-advance models), Bailey’s rule to evaluate the welfare efect of infation is in deed accurate. The result applies for any technology or preference, if the long-run capital stock does not depend on the ination rate. In general, a dynamic version of Bailey’s rule is established. In particular, the result extends to models in which there is a banking sector that supplies money substitutes services. A dditionally, it is argued that the relevant money demand concept for this issue- the impact of in ination under welfare- is the monetary base.

Suggested Citation

  • Pessôa, Samuel de Abreu, 1999. "Bailey's rule for the welfare of inflation: a theoretical foundation," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 363, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    • Handle: RePEc:fgv:epgewp:363
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