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Working Paper 1997-012B

"How Costly is Sustained Low Inflation for the US Economy?"
by James Bullard, and Steven H. Russell

We study the welfare cost of inflation in a general equilibrium life cycle model with growth, costly financial intermediation, and taxes on nominal quantities. We find a stationary equilibrium of the model matches a wide variety of facts about the postwar U.S. economy. We then calculate that the inflation policy of the monetary authority has welfare consequences for agents that are an order of magnitude larger than existing estimates in the literature. These effects are large even at very low inflation rates. The bulk of the welfare cost of inflation can be attributed to the fact that inflation increases the effective tax rate on capital income.

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Category > Monetary Policy/Macroeconomics
Author > James Bullard
Research Papers and Publications: JEL Code > E4
Research Papers and Publications: JEL Code > E5