Measuring Welfare Cost of Inflation

Why should central banks fight against inflation? To answer this questionunderstanding the magnitude of welfare cost of inflation is important andbecomes an active research field. Economists always make some assumptionsto simplify the model from reality so that the model is tractable. But at thesame time these simplifications may affect the clear view on the source ofinflation cost and affect the way to measure the cost of inflation. This bookanalyzes the welfare cost of inflation in a general equilibrium framework thattakes into account more realistic factors in the real world a framework withmore generalized model settings of money demand side and money supplyside. On the money demand side interest-bearing deposits are introduced byapplying the monetary aggregation theory; on the supply side a bankingsector is established to produce interest-bearing deposits. The researchshould be useful for central bankers and researchers who are conducting researchon the policy of central banks and should benefit economist econometriciansand anyone else who are interested in general equilibriummodel or nonlinear threshold estimation.