MT-DP – 2018/31
The Welfare Cost of Inflation with Banking Time
The paper presents the welfare cost of inflation in a banking time economy that models
exchange credit through a bank production approach. The estimate of welfare cost uses
fundamental parameters of utility and production technologies. It is compared to a cash-only
economy, and a Lucas (2000) shopping economy without leisure, as special cases. The paper
estimates the welfare cost of a 10% inflation rate instead of zero, for comparison to other
estimates, as well as the cost of a 2% inflation rate instead of a zero inflation rate. The zero
rate is specified as the US inflation rate target in the 1978 Employment Act amendments. The
paper provides a conservative welfare cost estimate of 2% inflation instead of zero at $33
billion a year. Estimates of the percent of government expenditure that can be financed
through a 2% vs. zero inflation rate are also provided.
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