An Ordering of Measures of the Welfare Cost of Inflation in Economies with Interest-Bearing Deposits
41 Pages Posted: 31 Jan 2014
Date Written: December 3, 2007
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.
Keywords: Welfare, Interest-Bearing Assets, Money Demand, Divisia Index
JEL Classification: C0, E40
Suggested Citation: Suggested Citation