Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/222044 
Authors: 
Year of Publication: 
2018
Series/Report no.: 
IEHAS Discussion Papers No. MT-DP - 2018/31
Publisher: 
Hungarian Academy of Sciences, Institute of Economics, Budapest
Abstract: 
The paper presents the welfare cost of inflation in a banking time economy that models exchange credit through a bank production approach. The estimate of welfare cost uses fundamental parameters of utility and production technologies. It is compared to a cash-only economy, and a Lucas (2000) shopping economy without leisure, as special cases. The paper estimates the welfare cost of a 10% inflation rate instead of zero, for comparison to other estimates, as well as the cost of a 2% inflation rate instead of a zero inflation rate. The zero rate is specified as the US inflation rate target in the 1978 Employment Act amendments. The paper provides a conservative welfare cost estimate of 2% inflation instead of zero at $33 billion a year. Estimates of the percent of government expenditure that can be financed through a 2% vs. zero inflation rate are also provided.
Subjects: 
Euler equation
interest rates
inflation
banking
money demand
velocity
price-theoretic
marginal cost
productivity shocks
Great Recession
JEL: 
E13
E31
E43
E52
Document Type: 
Working Paper

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