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On the Welfare Cost of Inflation: The Case of Pakistan

Author

Listed:
  • Mushtaq, Siffat
  • Rashid, Abdul
  • Qayyum, Abdul

Abstract

In this study we quantified the welfare cost of inflation from the estimated long-run money demand functions for Pakistan for the period 1960-2007 using cointegration approach. The empirical results show that all the monetary aggregates are negatively related to the interest rate. The welfare gain of moving from positive inflation to zero inflation is approximately same under both money demand specifications but the behavior of the two models is different towards low interest rates. Moving from zero inflation to zero nominal interest rate has substantial gain under log-log form compared to the semi-log function. Compensating variation approach for the semi-log model gives higher welfare loss figures compared to the Bailey’s approach due to the quadratic nature of nominal interest rate in the Lucas (2000) welfare measure. However, the two approaches yield approximately similar the welfare cost of inflation for the log-log specification.

Suggested Citation

  • Mushtaq, Siffat & Rashid, Abdul & Qayyum, Abdul, 2013. "On the Welfare Cost of Inflation: The Case of Pakistan," MPRA Paper 47549, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:47549
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    More about this item

    Keywords

    Inflation; Welfare costs; Pakistan;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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