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The Welfare Cost of Ináation with Banking Time

Max Gillman ()

No 1014, Working Papers from University of Missouri-St. Louis, Department of Economics

Abstract: 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
Date: 2018-07
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Working Paper: The Welfare Cost of Inlation with Banking Time (2018) Downloads
Working Paper: The Welfare Cost of Inflation with Banking Time (2018) Downloads
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