The Welfare Cost of Permanent Inflation and Optimal Short-Run Economic Policy

34 Pages Posted: 27 Feb 2001 Last revised: 22 Jul 2010

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased); Harvard University (deceased)

Date Written: September 1977

Abstract

At a minimum, this paper should serve as a warning against too easy an acceptance of the view that the costs of sustained inflation are small relative to the costs of unemployment. If a temporary reduction in unemployment causes a permanent increase in inflation, the present value of the resulting future welfare costs may well exceed the temporary short-run gain. Previous analyses have underestimated the cost of a permanent increase in the inflation rate because they have ignored the growth of the economy and therefore the growth of the future instantaneous welfare costs. In the important case in which the growth of aggregate income exceeds the social discount rate, no reduction in unemployment can justify any permanent increase in the rate of inflation. Quite the contrary, if the inflation rate is above its optimal level, the economy should then be deflated to reduce the inflation rate regardless of the temporary consequences for unemployment.

Suggested Citation

Feldstein, Martin S., The Welfare Cost of Permanent Inflation and Optimal Short-Run Economic Policy (September 1977). NBER Working Paper No. w0201, Available at SSRN: https://ssrn.com/abstract=248587

Martin S. Feldstein (Contact Author)

National Bureau of Economic Research (NBER) (deceased)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-868-3905 (Phone)
617-868-7194 (Fax)

Harvard University (deceased)

Littauer Center
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-2167 (Phone)
617-496-5444 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
21
Abstract Views
768
PlumX Metrics