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Welfare Cost of Inflation: Evidence from India

Irfan Ahmad Shah (), Manmohan Lal Agarwal () and Srikanta Kundu
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Irfan Ahmad Shah: Centre for Development Studies
Manmohan Lal Agarwal: Centre for Development Studies

Journal of Quantitative Economics, 2019, vol. 17, issue 4, No 5, 799 pages

Abstract: Abstract In this paper, we estimate the welfare cost of inflation (WCI) to understand how costly anticipated inflation is in India. The WCI is estimated both in partial and general equilibrium framework using consumer surplus and compensating variation approaches. Based on the quarterly data from 1996–97Q1 to 2014–15Q2, we found that the WCI at an inflation rate of 10% is ~ 0.53% of GDP. This implies that reducing inflation from 10 to 0% may result in an output gain of 0.53% of GDP. The study also shows that the WCI is an increasing function of rate of inflation and inflation elasticity of money demand. The inflation elasticity is estimated through double-log and semi-log specifications of money demand using Fisher and Seater (Am Econ Rev 402–415, 1993) long-horizon regression approach. It is found that the specification of money demand influences the magnitude of WCI.

Keywords: Welfare cost of inflation; Inflation elasticity; Consumer surplus; Compensating variation approach; Money demand; E310; D110; E410 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s40953-018-0140-9

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Handle: RePEc:spr:jqecon:v:17:y:2019:i:4:d:10.1007_s40953-018-0140-9