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Bailey's Measure of the Welfare Costs of Inflation as a General‐Equilibrium Measure
Author(s) -
CYSNE RUBENS PENHA
Publication year - 2009
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2009.00214.x
Subject(s) - measure (data warehouse) , economics , mathematical economics , inflation (cosmology) , general equilibrium theory , welfare , econometrics , mathematics , macroeconomics , computer science , physics , theoretical physics , market economy , database
Lucas (2000) has shown that Bailey's formula for the welfare costs of inflation can be regarded as an approximation to the general‐equilibrium measures that emerge from the Sidrauski and the shopping‐time models. In this paper we show that Bailey's measure can be exactly obtained in the Sidrauski general‐equilibrium framework under the assumption of quasilinear preferences. The result, based on whether or not wealth effects are incorporated into the analysis, is also helpful in clarifying why Lucas' measure derived from the Sidrauski model turns out to be an upper bound to Bailey's. Two examples are used to illustrate the main conclusions.