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The Welfare Cost of Inflation in General Equilibrium, Working Paper 94-04

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The Welfare Cost of Inflation in General Equilibrium, Working Paper 94-04

DATE: March 1994

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ABSTRACT: This paper presents a general equilibrium monetary model in which inflation distorts a variety of marginal decisions. Although individually none of the distortions is very large, they combine to yield substantial welfare costs estimates. A sustained 4% inflation like that experienced in the U.S. since 1983 costs the economy the equivalent of 0.41% of output per year when currency is identified as the relevant definition of money and over 1% of output per year when M1 is defined as money. The results illustrate how the traditional, partial equilibrium approach can seriously underestimate the true cost of inflation.

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Dotsey, Michael and Ireland, Peter N. (Peter Nathan), 1966-. "The Welfare Cost of Inflation in General Equilibrium, Working Paper 94-04," Working Papers (Federal Reserve Bank of Richmond) (March 1994). https://fraser.stlouisfed.org/title/3942/item/477055, accessed on April 23, 2024.

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PUBLISHER: Federal Reserve Bank of Richmond

PLACE: Richmond

DIGITAL COPY SOURCE: Federal Reserve Bank of Richmond

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