Research Of The Welfare Cost Of Inflation In China

The international research of the welfare costs of inflation mainly focuses on thequantitative aspects, the theory basis of the study includes the traditional money demand theoryand the modern money demand theory. welfare costs of inflation is very hidden, so it isnecessary to use model to estimate the degree of the welfare costs of inflation.In this article, I will select modern theory of money demand’s perspective, use the Moneyin utility function model and Transaction costs model to estimate the degree of the welfare costsof inflation. Firstly, in the qualitative level, analysis the operating characteristics of China’sinflation and its negative effects between1996-2012.Secondly, in the quantitative level, I willselect the quarterly data of1996-2012,use ARCH method to estimate the double logarithmicform of the money demand function, then bring it to the models to estimate the he welfare costsof inflation in China. The empirical results show that, the estimations of the welfare costs ofinflation in China is very close, the transaction costs model’s result is smaller. Overall, percapita welfare costs of inflation in China is low, but the total social welfare cost of inflation ishuge. The study also found, welfare costs of inflation and nominal interest rate are positivelycorrelated, deflation can also cause the welfare costs, and in our country, the nominal interestrate is behind the rate of inflation,this will underestimate the welfare cost of inflation in China.Finally, according to the estimation,I proposed policy recommendations to reduce the welfarecost of inflation in China.