Welfare Costs of Inflation in a Dynamic Economy with Search Unemployment and Endogenous Growth

22 Pages Posted: 21 Mar 2001

See all articles by Burkhard Heer

Burkhard Heer

University of Augsburg; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 2000

Abstract

Recent work on money and endogenous growth finds modest welfare costs of inflation. Furthermore, high inflation reduces the growth rate. We present a monetary endogenous growth model with labor market frictions in the form of search unemployment which is calibrated for the US economy. Interestingly, both employment and the growth rate may even increase with the rate of inflation depending on the elasticity of labor supply. Considering the transition dynamics following a change in the monetary policy, the optimal quarterly inflation rate is found to amount to approximately 3.5% in the benchmark case. A reduction of the inflation rate from its optimal value to zero results in a welfare loss equal to 0.3% of total consumption.

Keywords: welfare costs of inflation, money demand, search unemployment, endogenous growth, transition dynamics

JEL Classification: O42, E31, J64

Suggested Citation

Heer, Burkhard, Welfare Costs of Inflation in a Dynamic Economy with Search Unemployment and Endogenous Growth (May 2000). CESifo Working Paper Series No. 296. Available at SSRN: https://ssrn.com/abstract=263793

Burkhard Heer (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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