Edited by Robert J. Brent
Chapter 10: The Welfare Effects of Inflation: A Cost–Benefit Perspective
10 The welfare effects of inflation: a cost– benefit perspective Karl-Heinz Tödter and Bernhard Manzke* If there is anything in the world which ought to be stable it is money, the measure of everything which enters the channels of trade. What confusion would there not be in a state where weights and measures frequently changed? On what basis and with what assurance would one person deal with another, and which nations would come to deal with people who lived in such disorder? (François LeBlanc 1690 in Einaudi, 1953, 233) 1 Introduction This chapter provides a theoretical and empirical overview of the welfare effects of inflation from a cost–benefit perspective. Cost–benefit analysis is a technique of applied welfare analysis which is widely used to judge the social desirability of an economic project or a policy change.1 In a modern society, inflation creates or amplifies distortions in many areas of economic activity and influences virtually all decisions of economic agents. Inflation has a similar effect on the value of money and savings as the sun on a cube of ice, it simply melts it away. Moving the ice cube into the shadow, like moderate and even low inflation, just slows the melting process. In contrast, price stability – potentially – freezes the value of money indefinitely.2 People decidedly dislike inflation (Shiller 1997, 14), but ‘opinions differ across countries, between generations in both the US and Germany, and, even more strikingly, between the general public and economists’. For a long time...
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