The Welfare Cost of Inflation with Banking Time
Max Gillman ()
No 1831, IEHAS Discussion Papers from Institute of Economics, Centre for Economic and Regional Studies
The paper presents the welfare cost of inflation in a banking time economy that models exchange credit through a bank production approach. The estimate of welfare cost uses fundamental parameters of utility and production technologies. It is compared to a cash-only economy, and a Lucas (2000) shopping economy without leisure, as special cases. The paper estimates the welfare cost of a 10% inflation rate instead of zero, for comparison to other estimates, as well as the cost of a 2% inflation rate instead of a zero inflation rate. The zero rate is specified as the US inflation rate target in the 1978 Employment Act amendments. The paper provides a conservative welfare cost estimate of 2% inflation instead of zero at $33 billion a year. Estimates of the percent of government expenditure that can be financed through a 2% vs. zero inflation rate are also provided.
Keywords: Euler equation; interest rates; inflation; banking; money demand; velocity; price-theoretic; marginal cost; productivity shocks; Great Recession (search for similar items in EconPapers)
JEL-codes: E13 E31 E43 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-isf, nep-mac and nep-mon
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Working Paper: The Welfare Cost of Inlation with Banking Time (2018)
Working Paper: The Welfare Cost of Ináation with Banking Time (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:has:discpr:1831
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