Some Costs and Benefits of Price Stability in the U.K.
SSRN Electronic Journal
1998
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Example: if you select the 1-year option for an article published in 2019 and a metric category shows 90%, that means that the article or review is performing better than 90% of the other articles/reviews published in that journal in 2019. If you select the 3-year option for the same article published in 2019 and the metric category shows 90%, that means that the article or review is performing better than 90% of the other articles/reviews published in that journal in 2019, 2018 and 2017.
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Article Description
In a previous attempt to articulate the costs of inflation (Leigh-Pemberton (1992)), the Bank of England outlined the following costs of a fully-anticipated inflation: - the cost of economising on real money balances -- so-called shoe-leather' effects; - the costs of operating a less-than-perfectly indexed tax system; - the costs of front-end loading' of nominal debt contracts; - the cost of constantly revising price lists -- so called menu costs' Feldstein (1996) quantified the first two of these costs when moving from 2% inflation to price stability in the U.S. Feldstein concluded that the permanent welfare gains through these two channels -- suitably discounted -- alone exceeded the transient costs of doing so. This paper aims to replicate Feldstein's analysis for the U.K. Welfare effects are quantified using deadweight loss analysis familiar from public finance economics. Because inflation exacerbates tax distortions that exist even without inflation, the welfare costs are trapezoids rather than the usual triangles, or, alternatively, first-order rather than second-order losses. We find that the welfare gains from moving to price stability through the two channels identified above are lower in
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