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Inflacio (2): Costos i Beneficis de la Inflacio

Inflacio (2): Costos i Beneficis de la Inflacio. Xavier Sala I Martin Teoria Economica IV UPF, Primavera 2010. Costs of Inflation. Anticipated Inflation Unanticipated Inflation . Costs of UNanticipated Inflation. Mistakes Lending: Borrowers-Lenders

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Inflacio (2): Costos i Beneficis de la Inflacio

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  1. Inflacio (2): Costos i Beneficis de la Inflacio Xavier Sala I Martin TeoriaEconomica IV UPF, Primavera 2010

  2. Costs of Inflation • Anticipated Inflation • Unanticipated Inflation

  3. Costs of UNanticipated Inflation • Mistakes • Lending: Borrowers-Lenders • πe=0.05, R=0.10 so expected r=0.05 • If π=0.10, r=0 • If π=0, r=0.10 • Wages: Firms-Workers • w=10 euros, P=1, so expected w/p=10 cookies • If P=2, then real wage w/p=5 cookies • If P=0.5, then real wage w/p=20 cookies • Redistribution • Same examples • High inflation associated with high variance (uncertainty) so less investment

  4. Costs of Anticipated Inflation • High inflation, less demand (Baumol-Tobin) • Tax System is not fully indexed • Income tax brackets expressed in nominal terms • Capital Gains tax • If buy a house at 100 and inflation and price of house increases by 50%, real price did not change, but I have to pay taxes • Menu costs • Inflation is a NON-Democratic tax • Oliveira-Tanzi effect • Money Illusion: wrong decisions even if anticipated

  5. Benefits of Anticipated Inflation • Seignorage (inflation is a tax so we can lower other taxes) • Some nominal prices are rigid downwards: allow for relative price adjustments

  6. Benefits of UNanticipated Inflation • Augmented Phillips Curve • Surprise inflation allows the government to reduce unemployment (more later)

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