Welfare Cost of (Low) Inflation
Author | : Mr.Howell H. Zee |
Publisher | : International Monetary Fund |
Total Pages | : 22 |
Release | : 1998-08-01 |
ISBN-10 | : 9781451853445 |
ISBN-13 | : 1451853440 |
Rating | : 4/5 (440 Downloads) |
Download or read book Welfare Cost of (Low) Inflation written by Mr.Howell H. Zee and published by International Monetary Fund. This book was released on 1998-08-01 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.