The welfare cost of inflation with banking time

Max Gillman 1 , 2 , 3
  • 1 University of Missouri, St. Louis, MO, USA
  • 2 IEHAS, Budapest, Hungary
  • 3 CERGE-EI, Prague, Czech Republic
Max Gillman
  • Corresponding author
  • University of Missouri, St. Louis, MO, USA
  • IEHAS, Budapest, Hungary
  • CERGE-EI, Prague, Czech Republic
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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.

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