the welfare cost of inflation: theory with an application of generalized method of moments (gmm) to iran
زمستان 1383 - شماره 12 ISC (18 صفحه - از 45 تا 62)
This paper empirically investigates the welfare cost of inflation in a money in utility function (MIUF) model. In order to do this, as in modern monetary theory, dynamic optimizing framework of a representative agent is used. This optimization process yields a system of stochastic nonlinear Euler equations that show the agent’s choices. The empirical analysis employs the generalized method of moments (GMM) technique to estimate the parameters of the system by using annual data for Iran, 1970- 2000. The structural parameters recovered from the estimation of the Euler equations of the model are statistically significant and economically meaningful. The results of this study confirm that the representative agent model fits the consumption and money data well. We find for low rate of inflation welfare cost markedly increases with increase in inflation but rapidly reaches an asymptote, that is the welfare cost of high inflation is 7 percent of GDP. The results show that the welfare loss due to an increase in the inflation from zero to 10 percent is equivalent to a decrease in real GDP over than 2 percent, more than twice as big as Lucas’ (2000) estimate for U. S. In this study, the implication of model about seigniorage is investigated too; our empirical finding in this regard indicates the stability of seigniorage to GDP ratio despite of wide fluctuation in the rate of inflation.خلاصه ماشینی:
"This paper, therefore, takes a dynamic general equilibrium model to assessing the welfare cost of inflation, utilizing annual data for the period 1970 - 2000, Iran. In order to estimate the model and drive its implications for the welfare cost of inflation and seigniorage, like Eichenbaum, Hansen and Singleton (1998), Eckstein and Leiderman (1992), Imrohoglu (1994) holman (1998), Bali (2000), Lepz (2000) and Friedman and Verbetsky (2001) in recent empirical studies of the representative agent’s dynamic optimization problem , we use the utility function , (6) Where is a preference parameter between zero and one? Substituting for , the derived demand for real monetary base from equation (7) and dividing by GDP per capita we get following expression for the ratio of seigniorage to GDP in steady state: (12) Where is the ratio of consumption to GDP and is the inverse of the money supply multiplier. Table 3, reports the results for the welfare cost of inflation, seigniorage as a percentage of GDP and for the inflation rate elasticity of money demand. (10) to compute the decrease in per capita consumption (expressed as percent of GDP ) that would generate the same welfare loss as that from increasing inflation from zero to a given rate in the table. To do this, we have presented estimates from parameters of a model that treats consumption and money demand behavior as jointly arising from a single optimizing framework of a representative agent, as in the modern monetary theory."
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