Durable Goods and Welfare Cost of Inflation
Date Issued
2009
Date
2009
Author(s)
Jr-Wei, Jau
Abstract
We study how durable goods affect the welfare cost of inflation in a Real Business Cycle model with cash-in-advance constraint. We modify the model of Cooley and Hansen (1989) to introduce consumption of durable goods into the model. We find that consumption of durable goodsoes not affect the welfare cost of inflation in the benchmark model with infinite Frisch labor supply elasticity. However, for more empirically plausible Frisch labor supply elasticity, there could be welfare gain from inflation as higher inflation induces the representative household to accumulate more durable goods. Higher consumption of durable goods can compensate for theecline in consumption of nondurable goods and even lead to a higher welfare. Our results suggest that modest inflation can be beneficial to the overall economy in long run when durable goods are taken into consideration.
Subjects
cash-in-advance constraint
welfare cost of in.ation
durable goods
Frisch labor supply elasticity
Type
thesis
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