Price Stability vs. Low Inflation in Germany: An Analysis of Costs and Benefits

Karl-Heinz Todter and Gerhard Ziebarth

No 6170, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We empirically investigate the costs and benefits of going from low inflation to price stability in the case of Germany. Recent empirical evidence on the sacrifice ratio suggests that the break-even point at which the permanent benefits of reducing the trend rate of inflation by 2 percentage points exceeds the temporary costs in terms of output losses is below 0.3% of GDP. We analyze the welfare implications of the interactions even of moderate rates of inflation with the distorting effects of the German tax system. Four areas of economic activity are considered: intertemporal allocation of consumption, demand for owner-occupied housing, money demand, and government debt service. We estimate the direct welfare effects of reducing the rate of inflation as well as the indirect tax revenue effects. We find that reducing the inflation rate by 2 percentage points permanently increases welfare by 1.4% of GDP. Finally, the optimal rate of disinflation is considered.

Date: 1997-09
Note: ME
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Citations: View citations in EconPapers (17)

Published as The Costs and Benefits of Price Stability. Feldstein, Martin, ed., Chicago: The University of Chicago Press, 1999, pp. 47-94.
Published as Price Stability versus Low Inflation in Germany: An Analysis of Costs and Benefits , Karl-Heinz Todter, Gerhard Ziebarth. in The Costs and Benefits of Price Stability , Feldstein. 1999

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