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Some Costs and Benefits of Price Stability in the United Kingdom

In: The Costs and Benefits of Price Stability

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  • Hasan Bakhshi
  • Andrew Haldane
  • Neal Hatch

Abstract

In a previous attempt to articulate the costs of inflation (Leigh-Pemberton (1992)), the Bank of England outlined the following costs of a fully-anticipated inflation: - the cost of economising on real money balances -- so-called shoe-leather' effects; - the costs of operating a less-than-perfectly indexed tax system; - the costs of front-end loading' of nominal debt contracts; - the cost of constantly revising price lists -- so called menu costs' Feldstein (1996) quantified the first two of these costs when moving from 2% inflation to price stability in the U.S. Feldstein concluded that the permanent welfare gains through these two channels -- suitably discounted -- alone exceeded the transient costs of doing so. This paper aims to replicate Feldstein's analysis for the U.K. Welfare effects are quantified using deadweight loss analysis familiar from public finance economics. Because inflation exacerbates tax distortions that exist even without inflation, the welfare costs are trapezoids rather than the usual triangles, or, alternatively, first-order rather than second-order losses. We find that the welfare gains from moving to price stability through the two channels identified above are lower in
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Suggested Citation

  • Hasan Bakhshi & Andrew Haldane & Neal Hatch, 1999. "Some Costs and Benefits of Price Stability in the United Kingdom," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 133-198, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:7773
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    1. The something for nothing culture
      by chris in Stumbling and Mumbling on 2015-07-04 17:28:19

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    2. Hasan Bakhshi, 1999. "Is the demand for retirement consumption linear?," Applied Economics Letters, Taylor & Francis Journals, vol. 6(10), pages 669-671.
    3. Kozo Ueda, 2001. "Costs of Inflation in Japan: Tax and Resource Allocation," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    4. Hasan Bakhshi & Ben Martin & Tony Yates, 2002. "How uncertain are the welfare costs of inflation?," Bank of England working papers 152, Bank of England.
    5. Mark A. Wynne, 2008. "How should central banks define price stability?," Globalization Institute Working Papers 08, Federal Reserve Bank of Dallas.
    6. Simon Hall & Mark Walsh & Anthony Yates, 1997. "How do UK companies set prices?," Bank of England working papers 67, Bank of England.
    7. Camba-Méndez, Gonzalo & Garcí­a, Juan Angel & Rodriguez-Palenzuela, Diego, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 278, European Central Bank.
    8. Simon Hall & Anthony Yates, 1998. "Are there downward nominal rigidities in product markets?," Bank of England working papers 80, Bank of England.
    9. Leo Bonato, 1998. "The benefits of price stability: some estimates for New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, September.
    10. Jacek Cukrowski & George Kavelashiwli, 2002. "Inflation and Adjustment of Relative Prices in Georgia," CASE-CEU Working Papers 0042, CASE-Center for Social and Economic Research.
    11. Javier Andrés & Ignacio Hernando & J. David López-Salido, 1999. "Assessing the benefits of price stability: The international experience," Estudios Económicos, Banco de España, number 69.
    12. Brian O'Reilly & Mylène Levac, 2000. "Inflation and the Tax System in Canada: An Exploratory Partial-Equilibrium Analysis," Staff Working Papers 00-18, Bank of Canada.
    13. Zafar Hayat, 2017. "Pakistan’s Monetary Policy: Some Fundamental Issues," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 56(1), pages 31-58.

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