The welfare cost of inflation

Apostolos Serletis and Libo Xu

Journal of Economic Dynamics and Control, 2021, vol. 128, issue C

Abstract: This paper uses neoclassical demand theory and applied consumption analysis to calculate the welfare cost of inflation, in the context of the Bailey (1956) approach. We integrate the demand for money with the demands for consumption and leisure, estimate flexible demand functions in a systems context, and show that raising the inflation rate from 2% to 4% in the United States, would impose (on average) a welfare cost equivalent to a loss of 0.30 percent of output when money is measured by our preferred (broad) Divisia M4 monetary aggregate. We also show that the welfare cost of inflation is countercyclical and trends upward over time.

Keywords: Flexible functional forms; Normalized quadratic demand system; Divisia monetary aggregates (search for similar items in EconPapers)
JEL-codes: C22 C32 C51 E41 E42 E52 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188921000798
Full text for ScienceDirect subscribers only

Related works:
Chapter: The Welfare Cost of Inflation (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:128:y:2021:i:c:s0165188921000798

DOI: 10.1016/j.jedc.2021.104144

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().