On the welfare cost of inflation in Europe

Abstract

This article follows Lucas (2000) and Serletis and Yavari (2005) and estimates the welfare cost of inflation in the Euro zone. It uses recent advances in the field of applied econometrics to estimate the interest elasticity of money demand and reports that the welfare cost of inflation is lower in big countries than it is in small countries.

Sectoral Money Demand Behaviour and the Welfare Cost of Inflation in the UK

“…Perhaps unsurprisingly, this stimulated a considerable amount of further research on the welfare cost of inflation (e.g. Attanasio et al ., ; Serletis and Yavari, , ; Ireland, ; Calza and Zaghini, , ; Cysne and Turchick, ). This further research has generated a number of welfare cost estimates, although none are as high as that reported in Lucas ().…”

“…Estimates based on data from other countries are also lower than that found in the influential Lucas () study. For example, Serletis and Yavari () study seven Eurozone countries over the period 1960–2000 and report estimated gains from reducing inflation by 5 percentage points in the range of 0.1 per cent GDP in France to 0.5 per cent GDP in Ireland. Yet lower estimates have been found by, for example, Attanasio et al .…”

“…Lucas () ensured that the welfare cost of inflation has again assumed importance among the classic questions in monetary economics; and a recent flurry of papers adopting the Bailey‐Lucas approach attests to the ongoing research interest (see, for example, Attanasio et al ., ; Serletis and Yavari, , ; Ireland, ; Calza and Zaghini, , ). One reason for this ongoing interest derives from the fact that estimates of the welfare cost of inflation provide a basis for estimating potential welfare gains from implementing monetary policies to reduce inflation.…”

Interest rate, money demand and seigniorage: The Chinese hyperinflation 1946–1949

“…Ireland (2009 finds the estimated η for the period 1980-2006 to be 0.087. Serletis and Yavari (2007) and Kimbrough and Spyridopoulos (2012) find the estimated elasticities to lie between 0.1 and 0.55 in several European countries. Notes: π t and i t are inflation rate and interest rate at month t, respectively.…”

On the Welfare Cost of Inflation: The Case of Pakistan

“…Using the same approaches of calculating welfare cost of inflation as in Serletis and Yavari (2003), they show that lowering the interest rate from 14% to 3% yield a benefit of about 0.4% of income. Same analysis was extended in Serletis and Yavari (2007) to calculate direct cost of inflation for seven European countries, Ireland, Australia, Italy, Netherlands, France, Germany, and Belgium. The welfare cost estimates of these countries showed that the cost is not homogeneous across these countries and is related to the size of the economy.…”