{
  "title": "Welfare Cost of (Low) Inflation: A General Equilibrium Perspective",
  "publication": "IMF Working Papers, August 1, 1998",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/welfare-cost-of-low-inflation-a-general-equilibrium-perspective-2682",
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  "summary": "This paper provides general equilibrium estimates of the steady-state welfare gains of lowering inflation from a low level to close to price stability, using an overlapping-generations growth model. Money demand is modeled on the basis that real money balances are a factor of production.",
  "sections": [
    {
      "heading": "Summary and Main Finding",
      "content": "- Provides general equilibrium estimates of the steady-state welfare gains of lowering inflation from a low level to close to price stability.\n- Uses an overlapping-generations growth model.\n- Money demand is modeled on the basis that real money balances are a factor of production.\n- Main quantitative conclusion: the welfare cost of low (positive) inflation is quantitatively very modest — under 0.2 percent of GDP annually within reasonable ranges of all parameter values.\n- Qualitative result: inflation unambiguously reduces capital intensity, drives up the before-tax real rate of return to capital, and unambiguously imposes a life-time welfare cost."
    },
    {
      "heading": "Model and Key Assumptions",
      "content": "- Framework: overlapping-generations growth model.\n- Money demand specification: real money balances enter as a factor of production.\n- Asset return relation: assumes a standard Fisher equation modified by the presence of an income tax.\n- Taxation: presence of an income tax affects the Fisher equation and hence real returns."
    },
    {
      "heading": "Quantitative Results and Interpretation",
      "content": "- Welfare cost estimate: under 0.2 percent of GDP annually (within reasonable parameter ranges).\n- Effects on capital and returns:\n  - Inflation reduces capital intensity (unambiguous).\n  - Inflation increases the before-tax real rate of return to capital (unambiguous).\n- Welfare implication: inflation imposes a life-time welfare cost (unambiguous), but the magnitude is modest as quantified above."
    },
    {
      "heading": "Policy Implications",
      "content": "- Lowering inflation from a low level toward price stability yields steady-state welfare gains, but the quantified gains are small (under 0.2 percent of GDP annually).\n- Given the model’s structure and parameter sensitivity, policy trade-offs involving the costs and benefits of reducing already-low inflation should account for the modest quantitative welfare gains highlighted.\n\n---\n\n Content in this bundle\n\n- Welfare Cost of\n  - Welfare Cost of (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Welfare Cost of (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/welfare-cost-of-low-inflation-a-general-equilibrium-perspective-2682"
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    "Authors: Howell H Zee",
    "Published: August 1, 1998",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451853445.001",
    "Provides general equilibrium estimates of the steady-state welfare gains of lowering inflation from a low level to close to price stability.",
    "Uses an overlapping-generations growth model.",
    "Money demand is modeled on the basis that real money balances are a factor of production.",
    "Main quantitative conclusion: the welfare cost of low (positive) inflation is quantitatively very modest — under 0.2 percent of GDP annually within reasonable ranges of all parameter values.",
    "Qualitative result: inflation unambiguously reduces capital intensity, drives up the before-tax real rate of return to capital, and unambiguously imposes a life-time welfare cost.",
    "Framework: overlapping-generations growth model.",
    "Money demand specification: real money balances enter as a factor of production.",
    "Asset return relation: assumes a standard Fisher equation modified by the presence of an income tax.",
    "Taxation: presence of an income tax affects the Fisher equation and hence real returns.",
    "Welfare cost estimate: under 0.2 percent of GDP annually (within reasonable parameter ranges).",
    "Effects on capital and returns:",
    "Welfare implication: inflation imposes a life-time welfare cost (unambiguous), but the magnitude is modest as quantified above.",
    "Lowering inflation from a low level toward price stability yields steady-state welfare gains, but the quantified gains are small (under 0.2 percent of GDP annually).",
    "Given the model’s structure and parameter sensitivity, policy trade-offs involving the costs and benefits of reducing already-low inflation should account for the modest quantitative welfare gains highlighted.",
    "**Welfare Cost of**"
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