Welfare Cost of Inflation in Iran (General Equilibrium Model Approach)

Document Type : Research Paper

Authors

1 Ph.D. Candidate in Economics, Department of Economics, Islamic Azad University, Science and Research Branch, Tehran, Iran

2 Assistant Professor, Department of Economics, Islamic Azad University, Science and Research Branch, Tehran, Iran

Abstract

Over the past decades, research on the welfare costs of inflation has become a significant area in monetary economics and, consequently, an important subject in macroeconomics. The welfare cost of inflation refers to changes in welfare caused by inflation and represents the damages inflicted by inflation through the monetary channel. Accordingly, this study aims to examine the welfare cost of inflation in a steady-state environment using a general equilibrium model approach for the Iranian economy. In this framework, money is introduced into the model through a cash-in-advance constraint. The results obtained from the model calibration indicate that with an increase in the monetary growth rate—and consequently the inflation rate—employment, output, and welfare income in the steady state decline. Furthermore, when the inflation rate is reduced from the benchmark level to the quarterly inflation target of 2%, the welfare gain would be equivalent to 0.11 percent of consumption. Therefore, based on the findings, it is recommended that due to the impact of monetary policies on welfare, the efficiency of monetary policy should be given due attention.

Keywords

Main Subjects

References

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