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Welfare Cost of (Low) Inflation: A General Equilibrium Perspective

Author

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  • Mr. Howell H Zee

Abstract

This paper provides general equilibrium estimates of the steady-state welfare gains of lowering inflation from a low level to close to price stability, using an overlapping-generations growth model. Money demand is modeled on the basis that real money balances are a factor of production. Assuming a standard Fisher equation modified by the presence of an income tax, it is found that inflation unambiguously reduces capital intensity, drives up the before-tax real rate of return to capital, and unambiguously imposes a life-time welfare cost. This welfare cost is, however, quantitatively very modest (under 0.2 percent of GDP annually) within reasonable ranges of all parameter values.

Suggested Citation

  • Mr. Howell H Zee, 1998. "Welfare Cost of (Low) Inflation: A General Equilibrium Perspective," IMF Working Papers 1998/111, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1998/111
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    Cited by:

    1. Irfan Ahmad Shah & Manmohan Lal Agarwal & Srikanta Kundu, 2019. "Welfare Cost of Inflation: Evidence from India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 17(4), pages 781-799, December.

    More about this item

    Keywords

    WP; inflation rate; rate of return;
    All these keywords.

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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