Price Stability vs. Low Inflation in Germany: An Analysis of Costs and Benefits / Karl-Heinz Todter, Gerhard Ziebarth.

Format:

Book

Author/Creator:

Todter, Karl-Heinz.

Contributor:

National Bureau of Economic Research.

Ziebarth, Gerhard.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6170.

NBER working paper series no. w6170

Language:

English

Subjects (All):

Inflation (Finance)--Econometric models.

Inflation (Finance).

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Price Stability vs. Low Inflation in Germany

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Cambridge, Mass. : National Bureau of Economic Research, 1997.

Summary:

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 effects. We find that reducing the inflation rate by 2 percentage points permanently increases welfare by 1.4% of GDP. Finally, the optimal rate of disinflation is considered.

Notes:

Print version record

September 1997.

Includes bibliographical references.