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

Author/Editor:

Howell H Zee

Publication Date:

August 1, 1998

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 1998/111

Subject:

Budget planning and preparation Consumption Demand for money Inflation Monetary base

English

Publication Date:

August 1, 1998

ISBN/ISSN:

9781451853445/1018-5941

Stock No:

WPIEA1111998

Pages:

21

Please address any questions about this title to publications@imf.org