Welfare Cost of (Low) Inflation: A General Equilibrium Perspective

This paper provides general equilibrium estimates of the steady-state welfare gains of lowering inflation from a low level to close to price stability, using an overlapping-generations growth model. Money demand is modeled on the basis that real money balances are a factor of production. Assuming a...

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Bibliographic Details
Main Author: Zee, Howell H. (Author)
Format: Electronic eBook
Language:English
Published: Washington, D.C International Monetary Fund 1998
Series:IMF Working Papers Working Paper No. 98/111
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Summary:This paper provides general equilibrium estimates of the steady-state welfare gains of lowering inflation from a low level to close to price stability, using an overlapping-generations growth model. Money demand is modeled on the basis that real money balances are a factor of production. Assuming a standard Fisher equation modified by the presence of an income tax, it is found that inflation unambiguously reduces capital intensity, drives up the before-tax real rate of return to capital, and unambiguously imposes a life-time welfare cost. This welfare cost is, however, quantitatively very modest (under 0.2 percent of GDP annually) within reasonable ranges of all parameter values
Physical Description:1 Online-Ressource (21 p)
ISBN:1451853440
9781451853445

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