NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Inflation and Welfare: Comment on Robert Lucas

Hans-Werner Sinn

NBER Working Paper No. 6979
Issued in February 1999
NBER Program(s):   PE

The paper argues that Lucas overestimates the Friedman-Bailey type of welfare cost of inflation and neglects other important welfare effects. With an alternative interpretation of the non-observability of low interest rates than the one Lucas gave and the introduction of taxes that reduce the opportunity cost of money holding, the welfare cost shrinks to one third of Lucas' estimate. The neglected welfare effects of inflation include an adverse Baumol-Tobin effect on growth and international capital movements, historical cost accounting for tax purposes, uncertainty about the price level and the relationship between inflation, relative prices and structural change.

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Document Object Identifier (DOI): 10.3386/w6979

Published:

  • CESifo Discussion Paper Nr.179, 1999 ,
  • Published in A. Leijonhufvud(ed.), "Monetary Theory as a Basis for Monetary Policy," MacMillan, 2001.

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