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THE WELFARE COST OF INFLATION IN OECD COUNTRIES

Published online by Cambridge University Press:  20 July 2011

Paola Boel  and
Gabriele Camera
Paola Boel
Affiliation:
Bowdoin College
Gabriele Camera*
Affiliation:
Purdue University
*
Address correspondence to: Gabriele Camera, Department of Economics, Krannert School of Management, Purdue University, 100 S. Grant Street, West Lafayette, IN 47907-2076, USA; e-mail: [email protected].
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Abstract

The welfare cost of anticipated inflation is quantified in a matching model of money calibrated to 23 different OECD countries for several sample periods. In most economies, in the common period 1978–1998, a representative agent would give up only a fraction of 1% of consumption to avoid 10% inflation. The welfare cost of inflation varies across countries, from a fraction of 0.1% in Japan, to more than 2% in Australia, reaching 6% with bargaining. The model fits money demand data of several countries poorly, however. The fit generally improves with longer sample periods. The results are fairly robust to variations in choice of calibrated parameters and calibration targets.

Keywords

MoneyFriedman RuleTrade Frictions
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Supplement S2: Money, Credit, and Liquidity: Part 2 , September 2011 , pp. 217 - 251
Copyright
Copyright © Cambridge University Press 2011

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