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The welfare cost of inflation with banking time

Max Gillman EMAIL logo

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, Robert Jr. E. 2000. “Inflation and Welfare.” Econometrica 68 (2): 247–274.] 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. A zero rate is statutorily 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.

JEL Classification: E13; E31; E43; E52

Acknowledgements

I acknowledge valuable comments from the Editor and Referee of the journal, from Tamas Csabafi, Michal Kejak, from many students at CEU, Cardiff and UMSL, and also appreciate the funding of Czech Science Foundation GACR 13-34096S.

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Published Online: 2018-12-20

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