Welfare costs of inflation: the case for interest-bearing money and empirical estimates for Brazil

We provide in this paper a closed fonn for the Welfare Cost of Inflation which we prove to be closer than Bailey's expression to the correct solution of the corresponding non-separable differential equation. Next. we extend this approach to ao economy with interest-bearing money, once again presenting a better appoximation than the one given by Bailey's approach. Fmally, empirical estimates for Brazil are presented.

WeIfare costs of inflation the case for interest-bearing money and empiricaI Estimates for Brazil

We provide in this paper a closed fonn for the Welfare Cost of Inflation which we prove to be closer than Bailey's expression to the correct solution of the corresponding non-separable differential equation. Next, we extend this approach to an economy with interest-bearing money, once again presenting a better appoximation than the one given by Bailey's approach. Finally, empirical estimates for Brazil are presented.

A restatement of the welafare costs of inflation. The wast of scarce resources in the manufacturing , banking and household sectors

Lucas (2000) estimates that the US welfare costs of inflation are around 1% of GDP. This measurement is consistent with a speci…c distorting channel in terms of the Bailey triangle under the demand for monetary base schedule (outside money): the displacement of resources from the production of consumption goods to the household transaction time à la Baumol. Here, we consider also several new types of distortions in the manufacturing and banking industries. Our new evidences show that both banks and firms demand special occupational employments to avoid the inflation tax. We de…ne the concept of ”the foat labor”: The occupational employments that are aflected by the in‡ation rates. More administrative workers are hired relatively to the bluecollar workers for producing consumption goods. This new phenomenon makes the manufacturing industry more roundabout. To take into account this new stylized fact and others, we redo at same time both ”The model 5: A Banking Sector -2” formulated by Lucas (1993) and ”The Competitive Banking System” proposed by Yoshino (1993). This modelling allows us to characterize better the new types of misallocations. We …nd that the maximum value of the resources wasted by the US economy happened in the years 1980-81, after the 2nd oil shock. In these years, we estimate the excess resources that are allocated for every speci…c distorting channel: i) The US commercial banks spent additional resources of around 2% of GDP; ii) For the purpose of the firm foating time were used between 2.4% and 4.1% of GDP); and iii) For the household transaction time were allocated between 3.1% and 4.5 % of GDP. The Bailey triangle under the demand for the monetary base schedule represented around 1% of GDP, which is consistent with Lucas (2000). We estimate that the US total welfare costs of in‡ation were around 10% of GDP in terms of the consumption goods foregone. The big di¤erence between our results and Lucas (2000) are mainly due to the Harberger triangle in the market for loans (inside money) which makes part of the household transaction time, of the …rm ‡oat labor and of the distortion in the banking industry. This triangle arises due to the widening interest rates spread in the presence of a distorting inflation tax and under a fractionally reserve system. The Harberger triangle can represent 80% of the total welfare costs of inflation while the remaining percentage is split almost equally between the Bailey triangle and the resources used for the bank services. Finally, we formulate several theorems in terms of the optimal nonneutral monetary policy so as to compare with the classical monetary theory.

Welfare costs of inflation when interest-bearing deposits are disregarded: a calculation of the bias

Most estimates of the welfare costs of in ation are devised considering only noninterest- bearing assets, ignoring that since the 80s technological innovations and new regulations have increased the liquidity of interest-bearing deposits. We investigate the resulting bias. Suscient and necessary conditions on its sign are presented, along with closed-form expressions for its magnitude. Two examples dealing with bidimensional bilogarithmic money demands show that disregarding interest-bearing monies may lead to a non-negligible overestimation of the welfare costs of in ation. An intuitive explanation is that such assets may partially make up for the decreased demand of noninterest-bearing assets due to higher in ation.

Avoiding some costs of inflation and crawling toward hyperinflation : the case of the Brazilian domestic currency substitute

The pattem of a classical hyperinflation is an acute acceleration of the inflation levei accompanied by rapid substitution away from domestic currency. Brazil, however, has becn experiencing inflation leveis well above 1,000% a year since 1988 without entering the classical hyperinflation path. Two elements play key roles in differcntiating the Brazilian case from other hyperinflationary experiences: indexation and the provision of a reliable domestic currency substitute, Le., the provision of liquidity to interest-bearing assets. This paper claims that the existence of this domestic currency substitute is lhe main source of both lhe inability of the Brazilian central bank to fight inflation and of the unwillingness of Brazilians to face the costs of such a fight. The provision of the domestic currency substitute through the banking sector is modeled, and the main macroeconomic consequences of this monetary regime are derived. Those are: the lack of a nominal anchor for the price system due to the passive monetary policy; the endogeneity of seignorage unlikc traditional models of hyperinflation; and lhe ineffectiveness of very high real interest rates.

A general-equilibrium closed-form solution to the welfare costs of inflation (Forthcoming, Revista Brasileira de Economia)

This work presents closed-form solutions to Lucasís (2000) generalequilibrium expression for the welfare costs of ináation, as well as to the di§erence between the general-equlibrium measure and Baileyís (1956) partial-equilibrium measure. In Lucasís original work only numerical solutions are provided.

Endogenous time-dependent rules and the costs of disinflation with imperfect credibility

This paper examines the output effects of monetary disinflation in a model with endogenous time-dependent pricing rules and imperfect credibility of the disinflation policy. We find that these features interact to generate an additional effect on top f the ones obtained with either endogenous time-dependent rules (Bonomo and Carvalho, 2003) or imperfect credibility (Ball, 1995) in isolation. This results in higher output costs of monetary disinflation.

Essays on competition and returns of inside money

In an early paper, Cavalcanti and Wallace (2001) showed, using a computable version of Cavalcanti-Wallace model (CW-1999), that optimal regulation induces banks to pay interests, instead of contracting the money supply in an inside money allocation. Here, we generalize CW in two fashions, assuming inside money allocations, so that banks are supposed to issue money as they find a potential producer wishing to produce. The first generalization allows for seasonality due to real shocks on preferences with persistence and for monetary policy improvement. We found an asymmetric path for interest rates when constraints matter, even when shocks are independent. The second generalization allows for bank competition, in the sense that banks can choose between two different banking nets. We proof the existence of simple stable and unstable equilibria and also verify the existence of multiple equilibria.

The development agenda for WIPO: another stillbirth?: A batttle between access to knowledge and enclousure

This paper has been produced as part of the examination in order to obtain a Master degree in Law (LLM), in Intellectual Property, at Queen Mary & Westfield College, University of London.

The costs of education, longevity and the poverty of nations

This paper explores the distortions on the cost of education, associated with government policies and institutional factors, as an additional determinant of cross-country income differences. Agents are finitely lived and the model takes into account life-cycle features of human capital accumulation. There are two sectors, one producing goods and the other providing educational services. The model is calibrated and simulated for 89 economies. We find that human capital taxation has a relevant impact on incomes, which is amplified by its indirect effect on returns to physical capital. Life expectancy plays an important role in determining long-run output: the expansion of the population working life increases the present value of the flow of wages, which induces further human capital investment and raises incomes. Although in our simulations the largest gains are observed when productivity is equated across countries, changes in longevity and in the incentives to educational investment are too relevant to ignore.

On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century

Lucas (1987) has shown a surprising result in business-cycle research: the welfare cost of business cycles are very small. Our paper has several original contributions. First, in computing welfare costs, we propose a novel setup that separates the effects of uncertainty stemming from business-cycle fluctuations and economic-growth variation. Second, we extend the sample from which to compute the moments of consumption: the whole of the literature chose primarily to work with post-WWII data. For this period, actual consumption is already a result of counter-cyclical policies, and is potentially smoother than what it otherwise have been in their absence. So, we employ also pre-WWII data. Third, we take an econometric approach and compute explicitly the asymptotic standard deviation of welfare costs using the Delta Method. Estimates of welfare costs show major differences for the pre-WWII and the post-WWII era. They can reach up to 15 times for reasonable parameter values -β=0.985, and ∅=5. For example, in the pre-WWII period (1901-1941), welfare cost estimates are 0.31% of consumption if we consider only permanent shocks and 0.61% of consumption if we consider only transitory shocks. In comparison, the post-WWII era is much quieter: welfare costs of economic growth are 0.11% and welfare costs of business cycles are 0.037% - the latter being very close to the estimate in Lucas (0.040%). Estimates of marginal welfare costs are roughly twice the size of the total welfare costs. For the pre-WWII era, marginal welfare costs of economic-growth and business- cycle fluctuations are respectively 0.63% and 1.17% of per-capita consumption. The same figures for the post-WWII era are, respectively, 0.21% and 0.07% of per-capita consumption.

On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century

Lucas(1987) has shown a surprising result in business-cycle research: the welfare cost of business cycles are very small. Our paper has several original contributions. First, in computing welfare costs, we propose a novel setup that separates the effects of uncertainty stemming from business-cycle uctuations and economic-growth variation. Second, we extend the sample from which to compute the moments of consumption: the whole of the literature chose primarily to work with post-WWII data. For this period, actual consumption is already a result of counter-cyclical policies, and is potentially smoother than what it otherwise have been in their absence. So, we employ also pre-WWII data. Third, we take an econometric approach and compute explicitly the asymptotic standard deviation of welfare costs using the Delta Method. Estimates of welfare costs show major diferences for the pre-WWII and the post-WWII era. They can reach up to 15 times for reasonable parameter values = 0:985, and = 5. For example, in the pre-WWII period (1901-1941), welfare cost estimates are 0.31% of consumption if we consider only permanent shocks and 0.61% of consumption if we consider only transitory shocks. In comparison, the post-WWII era is much quieter: welfare costs of economic growth are 0.11% and welfare costs of business cycles are 0.037% the latter being very close to the estimate in Lucas (0.040%). Estimates of marginal welfare costs are roughly twice the size of the total welfare costs. For the pre-WWII era, marginal welfare costs of economic-growth and business-cycle uctuations are respectively 0.63% and 1.17% of per-capita consumption. The same gures for the post-WWII era are, respectively, 0.21% and 0.07% of per-capita consumption.

On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century and beyond

The main objective of this paper is to propose a novel setup that allows estimating separately the welfare costs of the uncertainty stemming from business-cycle uctuations and from economic-growth variation, when the two types of shocks associated with them (respectively,transitory and permanent shocks) hit consumption simultaneously. Separating these welfare costs requires dealing with degenerate bivariate distributions. Levis Continuity Theorem and the Disintegration Theorem allow us to adequately de ne the one-dimensional limiting marginal distributions. Under Normality, we show that the parameters of the original marginal distributions are not afected, providing the means for calculating separately the welfare costs of business-cycle uctuations and of economic-growth variation. Our empirical results show that, if we consider only transitory shocks, the welfare cost of business cycles is much smaller than previously thought. Indeed, we found it to be negative - -0:03% of per-capita consumption! On the other hand, we found that the welfare cost of economic-growth variation is relatively large. Our estimate for reasonable preference-parameter values shows that it is 0:71% of consumption US$ 208:98 per person, per year.

Temporal causality between the exchange rate and the trade balance : the case of Brazil

The paper assesses the impact of intemational relative prices and domestic expenditure variables on Brazil' s foreign trade performance in the first half of the 1990s. It has been argued that the appreciation of the Real since 1994 has had a detrimental impact of the country's trade balance. However, using temporal precedence analysis, our results do not indicate that the trade balance is strongly affected by intemational rei ative prices, such as the exchange rate. Instead, domestic expenditure variables appear to be more powerful determinant of the country' s trade performance in recent years. Granger and error correction causality techniques are used to determine temporal precedence between the trade balance and the exchange rate in the period under examination. Our findings shed light on the debate over the sustainability of recent exchange rate-anchored macroeconomic stabilisation programmes, which is a topic that has encouraged a lot of debate among academics and practitioners.