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Thresholds and the Welfare Cost of Inflation

Author

Listed:
  • Robert R. Reed
  • Edgar A. Ghossoub

    (UTSA)

Abstract

The neoclassical growth model is the benchmark framework for studying the welfare effects of inflation. However, existing work likely produces misleading estimates because it does not include any mechanism for in?ation to promote capital accumulation and welfare. Such rigid assumptions do not line up with recent evidence of a Tobin e¤ect for advanced economies like the United States. Based upon empirical results, we present a model in which there are threshold e¤ects from in?ation to the reliance on cash. Our analysis makes considerable progress in determining the costs of in?ation by acknowledging a Tobin e¤ect occurs at low in?ation rates but trying to exploit a tradeo¤ at high rates distorts the e¢ ciency of the payments system with strong adverse consequences for the capital stock and welfare.

Suggested Citation

  • Robert R. Reed & Edgar A. Ghossoub, 2013. "Thresholds and the Welfare Cost of Inflation," Working Papers 0186eco, College of Business, University of Texas at San Antonio.
    • Handle: RePEc:tsa:wpaper:0186eco
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Payments System; Money Demand; Capital Accumulation; In?ation;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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