Welfare Costs of Inflation When Interest-Bearing Deposits are Disregarded: A Calculation of the Bias
38 Pages Posted: 31 Jan 2014
Date Written: January 2010
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