The Welfare Cost of Permanent Inflation and Optimal Short-Run Economic Policy / Martin Feldstein.

Format:

Book

Author/Creator:

Feldstein, Martin.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0201.

NBER working paper series no. w0201

Language:

English

Subjects (All):

Money supply.

Unemployment--Effect of inflation on--Econometric models.

Unemployment.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1977.

Cambridge, Massachusetts : National Bureau of Economic Research, 1977.

Summary:

At a minimum, this paper should serve as a warning against too easy an acceptance of the view that the costs of sustained inflation are small relative to the costs of unemployment. If a temporary reduction in unemployment causes a permanent increase in inflation, the present value of the resulting future welfare costs may well exceed the temporary short-run gain. Previous analyses have underestimated the cost of a permanent increase in the inflation rate because they have ignored the growth of the economy and therefore the growth of the future instantaneous welfare costs. In the important case in which the growth of aggregate income exceeds the social discount rate, no reduction in unemployment can justify any permanent increase in the rate of inflation. Quite the contrary, if the inflation rate is above its optimal level, the economy should then be deflated to reduce the inflation rate regardless of the temporary consequences for unemployment.

Notes:

Print version record

September 1977.