Divisia indexes, money and welfare

Rubens Cysne

No 396, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: We suggest the use of a particular Divisia index for measuring welfare losses due to interest rate wedges and in‡ation. Compared to the existing options in the literature: i) when the demands for the monetary assets are known, closed-form solutions for the welfare measures can be obtained at a relatively lower algebraic cost; ii) less demanding integrability conditions allow for the recovery of welfare measures from a larger class of demand systems and; iii) when the demand speci…cations are not known, using an index number entitles the researcher to rank di¤erent vectors of opportunity costs directly from market observations. We use two examples to illustrate the method.

Date: 2000-07-01
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