Divisia Indexes, Money and Welfare
34 Pages Posted: 7 Feb 2014
Date Written: August 1, 2000
We suggest the use of a particular Divisia index for measuring welfare losses due to interest rate wedges and inflation. Compared to the existing options in the literature: i) when the demands for the monetary assets are known, closed-form solutions for the welfare measures can be obtained at a relatively lower algebraic cost; ii) less demanding integrability conditions allow for the recovery of welfare measures from a larger class of demand systems and; iii) when the demand specifications are not known, using an index number entitles the researcher to rank different vectors of opportunity costs directly from market observations. We use two examples to illustrate the method.
Keywords: Divisia index, inflation, welfare, money
JEL Classification: E40, D60
Suggested Citation: Suggested Citation