On the Welfare Cost of Inflation: The Case of Pakistan

Siffat Mushtaq, Abdul Rashid Abdul Rashid, Abdul Qayyum Abdul Qayyum

Abstract


In this paper, we quantify welfare costs of inflation for
Pakistan for the period 1960-2007 using semi-log and double-log money
demand functions. We find that the welfare gain of moving from positive
inflation to zero inflation is approximately the same under both money
demand specifications but the behaviour of the two models is fairly
different towards low interest rates. Moving from zero inflation to zero
nominal interest rate has a substantial gain under double-log form
compared to the semi-log function. The compensating variation approach
for the semi-log model gives higher welfare loss figures compared to
Bailey’s approach. However, the two approaches yield approximately the
same welfare cost of inflation for the double-log specification.
Keywords: Monetary Policy, Inflation, Interest Rate, Welfare Costs,
Money Demand Functions

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DOI: https://doi.org/10.30541/v51i1pp.61-96

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