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Two additions to Lucas's 'inflation and welfare'


  • Cysne, Rubens Penha


This work adds to Lucas (2000) by providing analytical solutions to two problems that are solved only numerically by the author. The first part uses a theorem in control theory (Arrow' s sufficiency theorem) to provide sufficiency conditions to characterize the optimum in a shopping-time problem where the value function need not be concave. In the original paper the optimality of the first-order condition is characterized only by means of a numerical analysis. The second part of the paper provides a closed-form solution to the general-equilibrium expression of the welfare costs of inflation when the money demand is double logarithmic. This closed-form solution allows for the precise calculation of the difference between the general-equilibrium and Bailey's partial-equilibrium estimates of the welfare losses due to inflation. Again, in Lucas's original paper, the solution to the general-equilibrium-case underlying nonlinear differential equation is done only numerically, and the posterior assertion that the general-equilibrium welfare figures cannot be distinguished from those derived using Bailey's formula rely only on numerical simulations as well.

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  • Cysne, Rubens Penha, 2004. "Two additions to Lucas's 'inflation and welfare'," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 543, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  • Handle: RePEc:fgv:epgewp:543

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    References listed on IDEAS

    1. Seierstad, Atle & Sydsaeter, Knut, 1977. "Sufficient Conditions in Optimal Control Theory," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 367-391, June.
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    Cited by:

    1. Monteiro, Paulo Klinger, 2009. "First-price auction symmetric equilibria with a general distribution," Games and Economic Behavior, Elsevier, vol. 65(1), pages 256-269, January.

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