Welfare Costs of Inflation When Interest-Bearing Deposits are Disregarded: A Calculation of the Bias

Cysne, Rubens Penha; Turchick, David

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Welfare Costs of Inflation When Interest-Bearing Deposits are Disregarded: A Calculation of the Bias

Macroeconomic Dynamics, Vol. 16, No. 5

38 Pages Posted: 31 Jan 2014

See all articles by Rubens Penha Cysne

Rubens Penha Cysne

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

David Turchick

Department of Economics, University of São Paulo (FEA-USP)

Date Written: January 2010

Abstract

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.

Keywords: Inflation, Welfare, Interest-Bearing Assets, Money Demand, Divisia Index

JEL Classification: E40, D60

Suggested Citation: Suggested Citation

Cysne, Rubens Penha and Turchick, David, Welfare Costs of Inflation When Interest-Bearing Deposits are Disregarded: A Calculation of the Bias (January 2010). Macroeconomic Dynamics, Vol. 16, No. 5, Available at SSRN: https://ssrn.com/abstract=2332217