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Output Gains from Economic Stabilization

Listed author(s):
  • Gylfason, T.

By driving a wedge between the marginal returns to real and financial capital, inflation distorts production. The elimination of this distorsion increases both the level and the rate of growth of output. First, increased price stability improves the utilization of capital and thus increases the full-employment level of output in the long run, even though output decreases initially. Second, the static output gain from stabilization is captured in a simple formula in which the gain is approximately proportional to the square of the original inflation distorsion.

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Paper provided by Stockholm - International Economic Studies in its series Papers with number 606.

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Length: 22 pages
Date of creation: 1996
Handle: RePEc:fth:stocin:606
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UNIVERSITY OF STOCKHOLM, INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES, S- 106 91 STOCKHOLM SWEDEN.

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