Welfare Cost Of Low Inflation
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Welfare Cost of (Low) Inflation
Author | : Mr.Howell H. Zee |
Publisher | : International Monetary Fund |
Total Pages | : 22 |
Release | : 1998-08-01 |
Genre | : Business & Economics |
ISBN | : 1451853440 |
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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.
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