Abstract

http://ssrn.com/abstract=263793
 


 



Welfare Costs of Inflation in a Dynamic Economy with Search Unemployment and Endogenous Growth


Burkhard Heer


University of Augsburg; CESifo (Center for Economic Studies and Ifo Institute)

May 2000

CESifo Working Paper Series No. 296

Abstract:     
Recent work on money and endogenous growth finds modest welfare costs of inflation. Furthermore, high inflation reduces the growth rate. We present a monetary endogenous growth model with labor market frictions in the form of search unemployment which is calibrated for the US economy. Interestingly, both employment and the growth rate may even increase with the rate of inflation depending on the elasticity of labor supply. Considering the transition dynamics following a change in the monetary policy, the optimal quarterly inflation rate is found to amount to approximately 3.5% in the benchmark case. A reduction of the inflation rate from its optimal value to zero results in a welfare loss equal to 0.3% of total consumption.

Number of Pages in PDF File: 22

Keywords: welfare costs of inflation, money demand, search unemployment, endogenous growth, transition dynamics

JEL Classification: O42, E31, J64

working papers series


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Date posted: March 21, 2001  

Suggested Citation

Heer, Burkhard, Welfare Costs of Inflation in a Dynamic Economy with Search Unemployment and Endogenous Growth (May 2000). CESifo Working Paper Series No. 296. Available at SSRN: http://ssrn.com/abstract=263793

Contact Information

Burkhard Heer (Contact Author)
University of Augsburg ( email )
Augsburg, 86135
Germany
CESifo (Center for Economic Studies and Ifo Institute) ( email )
Poschinger Str. 5
Munich, DE-81679
Germany
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