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Costs and Benefits of Inflation: A Model Analysis of Japan and the U.S

Author

Listed:
  • Tomohide Mineyama

    (Bank of Japan)

  • Wataru Hirata

    (Bank of Japan)

  • Kenji Nishizaki

    (Bank of Japan)

Abstract

Analyzing the costs and benefits of inflation has been a primary subject in monetary economics. This article presents a summary of Mineyama, Hirata, and Nishizaki (2019), which investigates the relationship between inflation and social welfare expressed as the economic satisfaction of households for Japan and the U.S. The authors' analysis employs a New Keynesian model which embeds the major factors affecting the costs and benefits of inflation. The analysis suggests (1) social welfare is maximized when the steady-state inflation rate, the level to which the inflation rate converges in the long run, is close to two percent for both Japan and the U.S.; and (2) around one percentage point absolute deviation from the close-to-two-percent rate induces only a minor change in social welfare. Note, however, that the estimates are subject to a considerable margin of error due to parameter uncertainty in the zero lower bound of nominal interest rates.

Suggested Citation

  • Tomohide Mineyama & Wataru Hirata & Kenji Nishizaki, 2019. "Costs and Benefits of Inflation: A Model Analysis of Japan and the U.S," Bank of Japan Research Laboratory Series 19-E-2, Bank of Japan.
    • Handle: RePEc:boj:bojlab:lab19e02
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    More about this item

    Keywords

    Inflation; Social welfare; New Keynesian model; Downward nominal wage rigidity; Zero lower bound; Forward guidance;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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