The welfare cost of inflation with banking time

Max Gillman

The B.E. Journal of Macroeconomics, 2020, vol. 20, issue 1, 20

Abstract: The paper presents the welfare cost of inflation in a banking time economy that models exchange credit through a bank production approach. The estimate of welfare cost uses fundamental parameters of utility and production technologies. It is compared to a cash-only economy, and a [Lucas, Robert Jr. E. 2000. “Inflation and Welfare.” Econometrica 68 (2): 247–274.] shopping economy without leisure, as special cases. The paper estimates the welfare cost of a 10% inflation rate instead of zero, for comparison to other estimates, as well as the cost of a 2% inflation rate instead of a zero inflation rate. A zero rate is statutorily specified as the US inflation rate target in the 1978 Employment Act amendments. The paper provides a conservative welfare cost estimate of 2% inflation instead of zero at $33 billion a year. Estimates of the percent of government expenditure that can be financed through a 2% vs. zero inflation rate are also provided.

Keywords: banking; Euler equation; Great Recession; inflation; interest rates; marginal cost; money demand; price-theoretic; productivity shocks; velocity (search for similar items in EconPapers)
JEL-codes: E13 E31 E43 E52 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: The Welfare Cost of Inlation with Banking Time (2018)
Working Paper: The Welfare Cost of Inflation with Banking Time (2018)
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DOI: 10.1515/bejm-2018-0059

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