[{"data":1,"prerenderedAt":-1},["ShallowReactive",2],{"doc-seo-325437-105":3,"detail-sidebar-cat-0-en-105":81,"doc-detail-325437-en":131},{"code":4,"msg":5,"data":6},0,"ok",{"site_id":7,"language":8,"slug":9,"title":10,"keywords":11,"description":12,"schema_data":13,"social_meta":74,"head_meta":76,"extra_data":78,"updated_unix":80},105,"en","rethinking-the-welfare-cost-of-inflation","Rethinking the Welfare Cost of Inflation","","The text explains how economists estimate the welfare cost of anticipated inflation and why modern models may yield higher costs than traditional approaches. It traces disinflation trends across advanced and developing economies and argues the benefits of lower inflation require measurable social costs from moderately high rates. It reviews the “welfare triangle” method, based on the convenience of holding money and the nominal interest rate, then motivates an alternative search-based monetary exchange framework. The discussion highlights the “shoe-leather cost” and concludes that inflation can be more costly than previously believed.",{"@graph":14,"@context":73},[15,34,56],{"@type":16,"itemListElement":17},"BreadcrumbList",[18,23,27,31],{"item":19,"name":20,"@type":21,"position":22},"https://docshare.wps.com","Home","ListItem",1,{"item":24,"name":25,"@type":21,"position":26},"https://docshare.wps.com/document/","Document",2,{"item":28,"name":29,"@type":21,"position":30},"https://docshare.wps.com/document/research-report/","Research & Report",3,{"item":32,"name":10,"@type":21,"position":33},"https://docshare.wps.com/document/rethinking-the-welfare-cost-of-inflation/325437/",4,{"url":32,"name":10,"@type":35,"image":36,"author":41,"headline":10,"publisher":44,"fileFormat":47,"inLanguage":8,"description":12,"dateModified":48,"datePublished":49,"encodingFormat":47,"isAccessibleForFree":50,"interactionStatistic":51},"DigitalDocument",{"url":37,"@type":38,"width":39,"height":40},"https://docshare.wps.com/thumbnails/rethinking-the-welfare-cost-of-inflation/325437.png","ImageObject",300,407,{"name":42,"@type":43},"Maeve","Person",{"url":19,"name":45,"@type":46},"DocShare","Organization","application/pdf","2026-10-28","2026-09-21",true,{"@type":52,"interactionType":53,"userInteractionCount":55},"InteractionCounter",{"@type":54},"ViewAction",12,{"@type":57,"mainEntity":58},"FAQPage",[59,65,69],{"name":60,"@type":61,"acceptedAnswer":62},"What does the text say causes the welfare cost of inflation?","Question",{"text":63,"@type":64},"Inflation erodes the purchasing power of money balances, reducing the services money provides for exchange. As inflation rises, individuals rely more on costlier alternative arrangements and financial intermediaries.","Answer",{"name":66,"@type":61,"acceptedAnswer":67},"Why is assessing long-run inflation costs described as difficult?",{"text":68,"@type":64},"A wide variety of estimates exist, and economists need to translate nonpecuniary benefits of holding money into dollar values. Different assumptions and methods produce different welfare-cost figures.",{"name":70,"@type":61,"acceptedAnswer":71},"How does the “welfare triangle” method evaluate inflation’s cost?",{"text":72,"@type":64},"It treats the nominal interest rate as a measure of the convenience of holding cash and links the welfare benefit to the area under the money demand curve. The cost is minimized when the nominal interest rate is zero, known as the Friedman rule.","https://schema.org",{"og:url":32,"og:type":75,"og:title":10,"og:site_name":45,"og:description":12},"article",{"robots":77,"canonical":32},"index,follow",{"doc_id":79,"site_id":7},325437,1790478758,{"code":4,"msg":82,"data":83},"success",[84,88,92,96,101,106,111,115,120,123,127],{"id":22,"doc_module":4,"doc_module_name":25,"category_name":85,"show_sort_weight":86,"slug":87},"Story & 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countries hasfallen,from 9percent in the first half ofthe 1980s to 2 percent since 2000.Thesame disinflation trend has beenobserved among developing countries.where inflation fell from 31 percent inthe first halfof the 1980s to less than 6percent since 2000(see figure 1).Thisphenomenon is even more remarkable ifone looks at LatinAmerica and transi-ion economies over the past 10 years:Inflation has been reduced from three-digit numbers(more than 100 percent)to about 10 percent in 2003.This\"global disinflation,\"as economist Ken-neth Rogoffcalls it,has occurred thanksto institutional changes such as greaterindependence of central banks,improved monetary regimes,and bettermacroeconomic policies.However,noneof these changes is costless.The UnitedStates,for example,went through amajor recession and a period of highunemployment during the early 1980s asinflation was brought down.For thisprocess to be worthwhile,it must be thecase that even moderately high inflationrates of,say,10 percent,generate sub-stantial costs to society.  \nYet assessing the costs of long-run infla-tion has proved difficult.A wide varietyof estimates has been proposed.At theoutset of the 1980s,Stanley Fischer sug-gested that the annual cost of 10 percentinflation was about 0.3 percent of grossdomestic product(GDP)everyyear,while Nobel Prize winner Robert Lucasfigured it was about 0.45 percent ofGDP.More recently(2000),Lucasrevised his estimate upward,to slightlyless than I percent of GDP.Some econo-mists believe that even this last numberunderestimates the true cost of inflation.Ricardo Lagos and Randall Wright are acase in point.Their recent study(to bepublished in 2005)gives measures for  \n# Rethinking the Welfare Cost of Inflation\n\nthe welfare cost of inflation rangingfrom I to 5 percent of GDP.To put thisin context,consider the median U.S.houschold.It eans about S45,000 a year.The cost of inflation for this houschold,according to these estimates,would bebetween S450 and S2,250 a year.  \nThis Commentary presents the wayseconomists see and measure the costsof anticipated inflation.We willfirstdescribe the idea of the \"welfaretriangle”—the traditional method usedto capture the problem and generate thecost estimates.It was developed byMartin Bailey and used subsequently byMilton Friedman(another Nobel Prizewinner),Stanley Fischer,and RobertLucas.Then we will take a look at thestrategy Lagos and Wright developed.It is based on an entirely differentapproach—the search mode of mone-tary exchange.This newapproachyields a surprising result:We will seethat inflation may be more costly thaneconomists used to think.  \n## ■ The“Welfare Triangle”\n\nMoney provides some services to societyby facilitating exchange.The cost ofinflation corresponds to a reduction inthese services.Because inflation erodesthe purchasing power of money balances,individuals tend to conduct their transac-tions with fewer money balances as theinflation rate increases.For instance,theyresort to altemative payment arrange-ments,such as credit or barter,which canbe less efficient or more costly.They alsobuy the services of financial intermedi-aries to help manage their cash balances.Milton Friedman offers the followingexample,one that gave rise to the termshoe-leather cost of inflation:“A retailercan economize on his average cashbalances by hiring an errand boy to go tothe bank on the comer to get change forlarge bills tendered by customers.Whent costs ten cents per dollar per year to  \nMarch 1,2005  \nNew models of monetary economies,developed in the last 15years,suggestthat traditional measures of the wel-fare cost of inflation may underesti-mate the true loss that inflation inflictson society.According to these models,the cost of 10 percent inflation rangesfrom 1 to 5percent of real income.  \nhold an extra dollar of cash,there will bea greater incentive to hire the errand boy,that is,to substitute other productiveres","cbCaiec9b6P64BfK","https://ap.wps.com/l/cbCaiec9b6P64BfK","pdf",1195826,"English","# Rethinking the Welfare Cost of Inflation\n## The“Welfare Triangle”","[{\"question\":\"What does the text say causes the welfare cost of inflation?\",\"answer\":\"Inflation erodes the purchasing power of money balances, reducing the services money provides for exchange. As inflation rises, individuals rely more on costlier alternative arrangements and financial intermediaries.\"},{\"question\":\"Why is assessing long-run inflation costs described as difficult?\",\"answer\":\"A wide variety of estimates exist, and economists need to translate nonpecuniary benefits of holding money into dollar values. Different assumptions and methods produce different welfare-cost figures.\"},{\"question\":\"How does the “welfare triangle” method evaluate inflation’s cost?\",\"answer\":\"It treats the nominal interest rate as a measure of the convenience of holding cash and links the welfare benefit to the area under the money demand curve. The cost is minimized when the nominal interest rate is zero, known as the Friedman rule.\"}]","Rethinking the Welfare Cost of Inflation | PDF",1789970500,13]