How costly is sustained low inflation for the U.S. economy?

James Bullard and Steven Russell

No 1997-012, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We study the welfare cost of inflation in a general equilibrium life cycle model with growth, costly financial intermediation, and taxes on nominal quantities. We find a stationary equilibrium of the model matches a wide variety of facts about the postwar U.S. economy. We then calculate that the inflation policy of the monetary authority has welfare consequences for agents that are an order of magnitude larger than existing estimates in the literature. These effects are large even at very low inflation rates. The bulk of the welfare cost of inflation can be attributed to the fact that inflation increases the effective tax rate on capital income.

Keywords: economic conditions - United States; Inflation (Finance) (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (17)

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Journal Article: How costly is sustained low inflation for the U.S. economy? (2004)
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DOI: 10.20955/wp.1997.012

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