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

Howell Zee

FinanzArchiv: Public Finance Analysis, 2001, vol. 57, issue 4, 376-393

Abstract: 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.

JEL-codes: D9 E4 H6 (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Welfare Cost of (Low) Inflation: A General Equilibrium Perspective (1998)
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