The welfare cost of inflation in general equilibrium

Michael Dotsey and Peter Ireland

No 94-04, Working Paper from Federal Reserve Bank of Richmond

Abstract: This paper presents a general equilibrium monetary model in which inflation distorts a variety of marginal decisions. Although individually none of the distortions is very large, they combine to yield substantial welfare cost estimates. A sustained 4% inflation like that experienced in the U.S. since 1983 costs the economy the equivalent of 0.41% of output per year when currency is identified as the relevant definition of money and over 1% of output per year when M1 is defined as money. The results illustrate how the traditional, partial equilibrium approach can seriously underestimate the true cost of inflation.

Keywords: Inflation; (Finance) (search for similar items in EconPapers)
Date: 1994
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Journal Article: The welfare cost of inflation in general equilibrium (1996)
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