Welfare costs of inflation in a dynamic economy with search unemployment

✍ Scribed by Burkhard Heer

• Publisher: Elsevier Science
• Year: 2003
• Tongue: English
• Weight: 552 KB
• Volume: 28
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(02)00136-7

✦ Synopsis

We present a monetary general equilibrium model with labor market frictions in the form of search unemployment which is calibrated for the US economy. Interestingly, both employment and output may even increase with the rate of in ation depending on the elasticity of labor supply. Considering the transition dynamics following a change in the monetary policy, the optimal quarterly in ation rate is found to amount to approximately -0:6% in the benchmark case. A reduction of the in ation rate from its current level to its optimal value only results in small welfare gains equal to 0.08% of total consumption.