Welfare Cost of Inflation in Iran (General Equilibrium Model Approach)

Hossein Nasrollahi, Karim Emami, Kambiz Peykarjou, Abbas Memarnejad and Taghi Torabi
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Hossein Nasrollahi: PhD student in Economics, Islamic Azad University, Science and Research Branch, Tehran, Iran
Karim Emami: Associate Professor at Science and Research Branch, Islamic Azad University, Tehran, Iran
Kambiz Peykarjou: Assistant Professor at Science and Research Branch, Islamic Azad University, Tehran, Iran
Abbas Memarnejad: Assistant Professor at Science and Research Branch, Islamic Azad University, Tehran, Iran
Taghi Torabi: Associate Professor at Science and Research Branch, Islamic Azad University, Tehran, Iran

Quarterly Journal of Applied Theories of Economics, 2025, vol. 12, issue 2, 55-74

Abstract: Over the past decades, research on the welfare costs of inflation has become a significant area in monetary economics and, consequently, an important subject in macroeconomics. The welfare cost of inflation refers to changes in welfare caused by inflation and represents the damages inflicted by inflation through the monetary channel. Accordingly, this study aims to examine the welfare cost of inflation in a steady-state environment using a general equilibrium model approach for the Iranian economy. In this framework, money is introduced into the model through a cash-in-advance constraint. The results obtained from the model calibration indicate that with an increase in the monetary growth rate—and consequently the inflation rate—employment, output, and welfare income in the steady state decline. Furthermore, when the inflation rate is reduced from the benchmark level to the quarterly inflation target of 2%, the welfare gain would be equivalent to 0.11 percent of consumption. Therefore, based on the findings, it is recommended that due to the impact of monetary policies on welfare, the efficiency of monetary policy should be given due attention.

Keywords: Inflation; general equilibrium; welfare; calibration; monetary policy (search for similar items in EconPapers)
JEL-codes: C19 D50 E52 (search for similar items in EconPapers)
Date: 2025
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