02310cam a22002537 4500001000600000003000500006005001700011008004100028100002300069245011800092260006600210490004100276500001900317520111200336530006101448538007201509538003601581690011701617690013101734710004201865830007601907856003701983856003602020w5469NBER20170219163313.0170219s1996 mau||||fs|||| 000 0 eng d1 aFeldstein, Martin.14aThe Costs and Benefits of Going from Low Inflation to Price Stabilityh[electronic resource] /cMartin Feldstein. aCambridge, Mass.bNational Bureau of Economic Researchc1996.1 aNBER working paper seriesvno. w5469 aFebruary 1996.3 aThis paper evaluates the welfare gain from achieving price stability and compares it to the cost of the transition. In calculating the gain from price stability, the paper emphasizes the distortions caused by the interaction of inflation and capital income taxes. Because inflation exacerbates the tax distortions that would exist even with price stability, the annual deadweight loss of a two percent inflation rate is a surprisingly large one percent of GDP. Since the real gain from shifting to price stability grows in perpetuity at the rate of growth of GDP, its present value is a substantial multiple of this annual gain. Discounting the annual gains at the rate that investors require for risky equity investments (i.e., at the 5.1 percent real net-of-tax rate of return on the Standard and Poors portfolio of equities from 1970 to 1994) implies a present value gain equal to more than 35 percent of the initial level of GDP. Since the estimated cost of shifting from two percent inflation to price stability is about five percent of GDP, the gain substantially outweighs the cost of transition. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE5 - Monetary Policy, Central Banking, and the Supply of Money and Credit2Journal of Economic Literature class. 7aE6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook2Journal of Economic Literature class.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w5469.4 uhttp://www.nber.org/papers/w546941uhttp://dx.doi.org/10.3386/w5469