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The Inflation Tax In A Real Business Cycle Model

Author

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  • COOLEY, T.F.
  • HANSEN, G.D.

Abstract

Money is incorporated into a real business cycle model using a cash-in-advance constraint. The model is used to analyze whether the business cycle is different in high-inflation and low-inflation economies and to analyze the impact of variability in the growth rate of money. The welfare cost of the inflation tax is measured and the steady-state properties of high and low inflation economies are compared. The welfare cost of a sustained (10 percent) inflation is estimated to be between 0.11 percent and 0.4 percent of GNP. The features of the business cycle are the same in high and low inflation economies, but the steady-state paths may be quite different. Copyright 1989 by American Economic Association.
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Suggested Citation

  • Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers 155, University of Rochester - Center for Economic Research (RCER).
    • Handle: RePEc:roc:rocher:155
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    References listed on IDEAS

    as
    1. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
    2. Lucas, Robert E., 1981. "Discussion of : Stanley Fischer, "towards an understanding of the costs of inflation: II"," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 43-52, January.
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    4. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
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    13. Martin Eichenbaum & Kenneth I. Singleton, 1986. "Do Equilibrium Real Business Cycle Theories Explain Postwar U.S. Business Cycles?," NBER Chapters,in: NBER Macroeconomics Annual 1986, Volume 1, pages 91-146 National Bureau of Economic Research, Inc.
    14. Edward C. Prescott, 1983. ""Can the cycle be reconciled with a consistent theory of expectations?" - or a progress report on business cycle theory," Working Papers 239, Federal Reserve Bank of Minneapolis.
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    16. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-944, October.
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