Some Costs and Benefits of Price Stability in the United Kingdom / Hasan Bakhshi, Andrew G. Haldane, Neal Hatch.

Format:

Book

Author/Creator:

Bakhshi, Hasan.

Contributor:

National Bureau of Economic Research.

Haldane, Andrew G.

Hatch, Neal.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6660.

NBER working paper series no. w6660

Language:

English

Subjects (All):

Taxation--Great Britain.

Taxation.

Inflation (Finance)--Econometric models.

Inflation (Finance).

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1998.

Cambridge, Massachusetts : National Bureau of Economic Research, 1998.

Summary:

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

Notes:

Print version record

July 1998.