The Output Effect of Stopping Inflation when Velocity is Time Varying
In: Durham Business School Working Paper No. 109
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In: Durham Business School Working Paper No. 109
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Working paper
In: The Manchester School, Band 69, Heft 5, S. 509-533
ISSN: 1467-9957
In this paper we use a continuous‐time, stochastic, dynamic general equilibrium model to provide estimates of the growth and welfare effects of monetary volatility. Our primary concern is to highlight the long‐run consequences of different monetary environments in a small open economy. Using UK‐relevant data to set key parameter values in the model, we carry out three policy experiments. We find that (i) eliminating monetary growth shocks and (ii) reducing the inflation rate can each generate positive growth and welfare effects, while (iii) reducing the interest rate depresses growth and is welfare deteriorating. However, these results are sensitive to the values set for the risk aversion and intertemporal substitution parameters. Most notably, in some cases, high degrees of risk aversion are sufficient to change the direction of the influence of volatility on growth and welfare—an issue currently challenging the profession.
In: Journal of economic studies, Band 25, Heft 6, S. 486-495
ISSN: 1758-7387
This paper tests the extended tax‐smoothing model for a sample of 32 developing countries. Importantly, the testable implications employed relax the assumption of constant money velocity. Although seigniorage is an important source of revenue in developing countries, all the evidence indicates that the principles of optimal taxation have not been used when developing countries raise revenue from inflation.
In: The Manchester School, Band 82, Heft 6, S. 732-750
ISSN: 1467-9957
In this paper, we estimate separate UK money demand functions for the household and corporate sectors; and calculate estimates of the welfare cost of inflation. We find that the household sector bears most of the welfare burden which is in sharp contrast to previous (US) evidence. Also, we find aggregate welfare cost estimates that are much smaller than previous (largely US) estimates—sufficiently smaller as to challenge the oft‐quoted Lucas finding that shoe leather costs are by no means trivial. For the UK, we find welfare costs no greater than one tenth of a per cent of real income.
In: Journal of development economics, Band 58, Heft 1, S. 255-264
ISSN: 0304-3878