Study On The Measurement Of Welfare Cost Of Inflation And Practice In China

It is widely held that a little bit inflation is good for the economy. So the government may push the inflation rate up by issuing money, in order to get a lower unemployment rate. But as the inflation rate goes up, people will require that the government take the price level down. So the government is in an awkward situation because people hate both high inflation rate and high unemployment rate. To solve this problem, the cost of increasing the inflation rate and the gain of decreasing the unemployment rate must be measured, and then the right policy could be chosen. So how the inflation affects people's welfare is an important factor which affects the chosen of policy.The goal of this paper is to introduce the researches about the welfare costs of inflation in detail, and then try to measure the costs of China, in the hope of filling up the blank in this field in China and motivating further researches.There are five sections in this paper. In the first section, the definition of the welfare costs of inflation is introduced and a brief summary about the previous researches is done to show where this line of research stands today. In a word, an assessment of the welfare costs of inflation requires a sound understanding of the benefits of monetary exchange relative to alternative payment arrangement or, equivalently, a theory of why money is useful.In the second section, the research of Bailey (1956) is introduced in detail. He was the first economist who presented the method of how to measure the welfare costs of inflation. He defined the famous welfare triangle, the area under the inverse money demand function, as the welfare costs of inflation.In the third section, the main researches about this subject after Bailey (1956) are introduced. The researches are done by Fisher (1981),...