Hostname: page-component-8448b6f56d-jr42d Total loading time: 0 Render date: 2024-04-23T11:26:24.641Z Has data issue: false hasContentIssue false
  • English
  • Français

THE WELFARE COST OF INFLATION IN OECD COUNTRIES

Published online by Cambridge University Press:  20 July 2011

Paola Boel  and
Gabriele Camera
Paola Boel
Affiliation:
Bowdoin College
Gabriele Camera*
Affiliation:
Purdue University
*
Address correspondence to: Gabriele Camera, Department of Economics, Krannert School of Management, Purdue University, 100 S. Grant Street, West Lafayette, IN 47907-2076, USA; e-mail: gcamera@purdue.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

The welfare cost of anticipated inflation is quantified in a matching model of money calibrated to 23 different OECD countries for several sample periods. In most economies, in the common period 1978–1998, a representative agent would give up only a fraction of 1% of consumption to avoid 10% inflation. The welfare cost of inflation varies across countries, from a fraction of 0.1% in Japan, to more than 2% in Australia, reaching 6% with bargaining. The model fits money demand data of several countries poorly, however. The fit generally improves with longer sample periods. The results are fairly robust to variations in choice of calibrated parameters and calibration targets.

Keywords

MoneyFriedman RuleTrade Frictions
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Supplement S2: Money, Credit, and Liquidity: Part 2 , September 2011 , pp. 217 - 251
Copyright
Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Akyol, Ahmet (2004) Optimal monetary policy in an economy with incomplete markets and idiosyncratic risk. Journal of Monetary Economics 51, 1245–1269.CrossRefGoogle Scholar
Aruoba, S. Borağan, Waller, Cristopher J., and Wright, Randall (2007) Money and Capital. Unpublished paper, University of Notre Dame.Google Scholar
Barelli, Paulo and de Abreu Pessôa, Samuel (2009) On the general equilibrium costs of perfectly anticipated inflation. Annals of Finance 5, 243–262.CrossRefGoogle Scholar
Berentsen, Alexsander, Camera, Gabriele, and Waller, Cristopher J. (2007) Money, credit, and banking. Journal of Economic Theory 135, 171–195.CrossRefGoogle Scholar
Boel, Paola and Camera, Gabriele (2009) Financial sophistication and the distribution of the welfare cost of inflation. Journal of Monetary Economics 56, 968–978.CrossRefGoogle Scholar
Chiu, Jonathan and Molico, Miguel (2007a) Idiosyncratic Uncertainty, Inflation, and Welfare. Unpublished paper, Bank of Canada.Google Scholar
Chiu, Jonathan and Molico, Miguel (2007b) Liquidity, Redistribution, and the Welfare Cost of Inflation. Working paper 2007-39, Bank of Canada.Google Scholar
Cooley, Thomas F. and Hansen, Gary D. (1989) The inflation tax in a real business cycle model. American Economic Review 79, 733–748.Google Scholar
Craig, Ben and Rocheteau, Guillaume (2008) Inflation and welfare: A search approach. Journal of Money, Credit and Banking 40, 89–119.CrossRefGoogle Scholar
Dotsey, Michael and Ireland, Peter (1996) The welfare cost of inflation in general equilibrium. Journal of Monetary Economics 37, 29–47.CrossRefGoogle Scholar
Erosa, Andrés and Ventura, Gustavo (2002) On inflation as a regressive consumption tax. Journal of Monetary Economics 49, 761–795.CrossRefGoogle Scholar
Fischer, Stanley (1981) Towards an understanding of the costs of inflation. Carnegie–Rochester Conference on Public Policy 15, 5–42.CrossRefGoogle Scholar
Goldfeld, Stephen M. and Sichel, Daniel E. (1990) The demand for money. In Friedman, Benjamin M. and Hahn, Frank (eds.), The Handbook of Monetary Economics, Vol. 1, pp. 299–356. Amsterdam: North-Holland.CrossRefGoogle Scholar
Lagos, Ricardo and Wright, Randall (2005) A unified framework for monetary theory and policy analysis. Journal of Political Economy 113, 463–484.CrossRefGoogle Scholar
Lucas, Robert E. Jr., (2000) Inflation and welfare. Econometrica 68, 247–274.CrossRefGoogle Scholar
Molico, Miguel (2006) The distribution of money and prices in search equilibrium. International Economic Review 47, 701–722.CrossRefGoogle Scholar
Reed, Robert R. and Waller, Cristopher J. (2006) Money and risk sharing. Journal of Money, Credit and Banking 38, 1599–1618.CrossRefGoogle Scholar
Rocheteau, Guillaume and Wright, Randall (2006) Inflation and welfare in models with trading frictions. In Altig, David E. and Nosal, Ed (eds.), Monetary Policy in Low Inflation Economies. Cambridge, UK: Cambridge University Press.Google Scholar
Serletis, Apostolos and Yavarib, Kazem (2004) The welfare cost of inflation in Canada and the United States. Economics Letters 84, 199–204.CrossRefGoogle Scholar
Telyukova, Irina A. and Wright, Randall (2007) A model of money and credit, with application to the credit card debt puzzle. Review of Economic Studies 75, 629–247.CrossRefGoogle Scholar
Wang, Pengfei and Wen, Yi (2007) Inflation dynamics: A cross-country investigation. Journal of Monetary Economics 54, 2004–2031.CrossRefGoogle Scholar
Wen, Yi (2009) Liquidity and Welfare in a Heterogeneous-Agent Economy. Working paper 2009-019B, Federal Reserve Bank of St. Louis.CrossRefGoogle Scholar