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NBER Working Papers and Publications
|January 1999||Price Stability versus Low Inflation in Germany: An Analysis of Costs and Benefits|
with Karl-Heinz Todter
in The Costs and Benefits of Price Stability, Martin Feldstein, editor
|September 1997||Price Stability vs. Low Inflation in Germany: An Analysis of Costs and Benefits|
with Karl-Heinz Todter: w6170
We empirically investigate the costs and benefits of going from low inflation to price stability in the case of Germany. Recent empirical evidence on the sacrifice ratio suggests that the break-even point at which the permanent benefits of reducing the trend rate of inflation by 2 percentage points exceeds the temporary costs in terms of output losses is below 0.3% of GDP. We analyze the welfare implications of the interactions even of moderate rates of inflation with the distorting effects of the German tax system. Four areas of economic activity are considered: intertemporal allocation of consumption, demand for owner-occupied housing, money demand, and government debt service. We estimate the direct welfare effects of reducing the rate of inflation as well as the indirect tax revenue ...