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Author: Robert Ware Hooper (Jr.)
Publisher:
ISBN:
Category :
Languages : en
Pages : 276
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Book Description
Author: Robert Ware Hooper (Jr.)
Publisher:
ISBN:
Category :
Languages : en
Pages : 276
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Book Description
Author: Mr.Etienne B. Yehoue
Publisher: International Monetary Fund
ISBN: 147550537X
Category : Business & Economics
Languages : en
Pages : 36
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Book Description
The financial crisis in the advanced countries that began in 2007 has led central bankers to adopt unconventional policy measures as policy interest rates neared the zero bound. One suggestion (Blanchard, Dell’Ariccia, and Mauro, 2010) has been to raise inflation targets to provide more room for policy rate easing during crises. This paper addresses a different issue: the relationship between inflation and welfare. The literature is surveyed and a model is developed. A key conclusion is that an increase in inflation targets gives rise to additional welfare costs, even after the extra room to maneuver above the zero lower bound for nominal policy rates is taken into account. Based on parameter values that fit U.S. data, the additional welfare costs of raising inflation targets from 2 to 4 percent are estimated at about 0.3 percent of annual real income. A rise to 10 percent would yield additional welfare costs of about 1 percent of real income. Other parameter values yield welfare costs as high as 7 (respectively 30) percent of real income for raising inflation targets from 2 to 4 (respectively from 2 to 10) percent. The full costs of raising inflation targets are likely to be higher because the model used to generate these estimates does not account for higher inflation-induced volatility.
Author: Rubens Penha Cysne
Publisher:
ISBN:
Category :
Languages : en
Pages : 41
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Book Description
This paper builds on Lucas (2000) and on Cysne (2003) to derive and order six alternative measures of the welfare costs of inflation (five of which already existing in the literature) for any vector of opportunity costs. The ordering of the functions is carried out for economies with or without interestbearing deposits. We provide examples and closed-form solutions for the log-log money demand both in the unidimensional and in the multidimensional setting (when interest-bearing monies are present). An estimate of the maximum relative error a researcher can incur when using any particular measure is also provided.
Author: Luigi Guiso
Publisher:
ISBN:
Category : Consumption (Economics)
Languages : en
Pages : 46
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Book Description
How far can shoe-leather go in explaining the welfare cost of inflation? Using a unique set of microeconomic data on households, we estimate the parameters of the demand for money derived from the generalized Baumol-Tobin model. Our data set contains information on average holdings of cash, on deposits and other interest bearing accounts, on the number of trips to the bank, on the size of withdrawals and on the ownership and use of ATM cards. We model the adoption of new transaction technologies and use these estimates to correct for the selectivity bias induced by some households choosing to hold no interest bearing assets and some to use an ATM card. The interest rate and expenditureflow elasticities of the demand for cash are close to the tehoretical values implied by standard inventory models. However, we find significant differences between the individuals with an ATM card and those without. The estimates of the demand for cash allow us to calculate a measure of the welfare cost of inflation analogous to Bailey's triangle, but based on a rigorous microeconomic framework. The welfare cost of inflation varies considerably within the population, but never turns out to be very large (about 0.1 percent of consumption or less). Our results are robust to various changes in the specification. In addition tot eh main results based on the average stock of cash held, we provide some evidence based on the number of trips to the bank and on the average withdrawals that confirm our basic findings.
Author: Ben R. Craig
Publisher:
ISBN:
Category :
Languages : en
Pages : 43
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Book Description
This paper extends recent findings in the search-theoretic literature on monetary exchange regarding the welfare costs of inflation. We present first estimates of the welfare cost of inflation using the welfare triangle methodology of Bailey (1958) and Lucas (2000). We then derive a money demand function from the search-theoretic model of Lagos and Wright (2005) and we estimate it from U.S. data over the period 1900-2000. We show that the welfare cost of inflation predicted by the model accords with the welfare-triangle measure when pricing mechanisms are such that buyers appropriate the social marginal benefit of their real balances. For other mechanisms, welfare triangles underestimate the true welfare cost of inflation because of a rent-sharing externality. We also point out other inefficiencies associated with noncompetitive pricing, which matter for estimating the cost of inflation. We then illustrate how endogenous participation decisions can mitigate or exacerbate the cost of inflaion, and we provide calibrated examples in which a deviation from the Friedman rule is optimal. Finally, we discuss distributional effects of inflation.
Author: Clark A. Burdick
Publisher:
ISBN:
Category : Inflation (Finance)
Languages : en
Pages : 56
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Book Description
Author: C. Angyridis
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This paper examines the costs associated with the level and variability of inflation in the context of a general equilibrium (GE) welfare measure which accommodates the optimal adjustments of all the endogenous variables in the model in response to the transfers received by the households. We compare and contrast the GE welfare costs with the conventional consumption equivalent (CE) measure across three utility functions that have been used routinely in the macroeconomics literature. We find that the GE welfare costs of inflation are substantially larger than those computed with the CE measure.
Author: Orazio Attanasio
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
We use microeconomic data on households to estimate the parameters of the demand for currency derived from a generalized Baumol-Tobin model. Our data set contains information on average currency, deposits, and other interest-bearing assets; the number of trips to the bank; the size of withdrawals; and ownership and use of ATM cards. We model the demand for currency accounting for adoption of new transaction technologies and the decision to hold interest-bearing assets. The interest rate and expenditure flow elasticities of the demand for currency are close to the theoretical values implied by standard inventory models. However, we find significant differences between individuals with an ATM card and those without. The estimates of the demand for currency allow us to calculate a measure of the welfare cost of inflation analogous to Bailey's triangle, but based on a rigorous microeconometric framework. The welfare cost of inflation varies considerably within the population but never turns out to be very large (about 0.1 percent of consumption or less). Our results are robust to various changes in the econometric specification. In addition to the main results based on the average stock of currency, the model receives further support from the analysis of the number of trips to and average withdrawals from the bank and the ATM.
Author: Lian Wang
Publisher: VDM Publishing
ISBN: 9783836455251
Category : Business & Economics
Languages : en
Pages : 232
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Book Description
Why should central banks fight against inflation? To answer this question, understanding the magnitude of welfare cost of inflation is important and becomes an active research field. Economists always make some assumptions to simplify the model from reality so that the model is tractable. But at the same time, these simplifications may affect the clear view on the source of inflation cost and affect the way to measure the cost of inflation. This book analyzes the welfare cost of inflation in a general equilibrium framework that takes into account more realistic factors in the real world, a framework with more generalized model settings of money demand side and money supply side. On the money demand side, interest-bearing deposits are introduced by applying the monetary aggregation theory; on the supply side, a banking sector is established to produce interest-bearing deposits. The research should be useful for central bankers and researchers who are conducting research on the policy of central banks, and should benefit economist, econometricians, and anyone else who are interested in general equilibrium model or nonlinear threshold estimation.
Author: Rubens Penha Cysne
Publisher:
ISBN:
Category :
Languages : en
Pages : 38
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Book Description
This paper builds on Lucas [Econometrica 68 (2000), 247-274] and on Cysne [Journal of Money, Credit and Banking 35 (2003), 221-238] to derive and order six alternative measures of the welfare costs of inflation (five of them already existing in the literature) for any vector of opportunity costs. We provide examples and closed-form solutions for each welfare measure based both on log-log and on semilog money demands, whenever possible in terms of elementary functions. Estimates of the maximum relative error a researcher can incur when using any of these measures are given. Everything is done for economies with or without interest-bearing deposits.
