The Measurement About The Difference Of Welfare Cost Of Inflation For Difference Income Groups In Town

Over the years, inflation has been an issue of great concern countries in the world. Economists generally believe that moderate inflation can promote economic growth and reduce unemployment, however, severe inflation will result in misallocation of resources, seriously affect the living standards of the residents. Since the reform and opening up, China’s price level has been very high in the long-term, at the same time, because of the big gap between rich and poor, and there are great differences in behavioral preferences and psychological factors, so the residents of different income groups actually are facing a different inflationary pressures. Facing with such pressure, people can not help asking: does inflation have welfare cost? Where are the starting point or perspective of the research of welfare cost of inflation? How can we measure the inflation? Whether there are differences in the welfare cost of inflation between different income groups? The article have a detailed explanation for the above problems.Welfare cost of inflation means that the long-standing of inflation will change the behavioral decision of actors, so that people will deviate from the original optimal decisions under non-inflation, then causing the deadweight loss to individuals, families and society. On the basis of a clear monetary theory, the paper sort out inflation and costs’ related concept, then the paper has a theoretical analysis on welfare effects from the distribution of wealth, resource allocation and manifestations of welfare cost, finally, lists three commonly measurement methods of estimating welfare cost of inflation, and having the comparative analysis.In the section of empirical analysis, in order to estimate the welfare cost differences between different income groups of urban residents. In this paper, the original money demand function has been improved, with the inflation rate and the savings rate as an indicator of different income groups to build heterogeneous money demand function. About the form of money demand function, based on the inflation situation is more serious in recent years, so the paper chooses more effectively semi-logarithmic form of money demand function under hyperinflation. In selected areas of data, due to constraints of reality, we only collect the relevant data from 2000 to 2012, the sample period is very short, in order to avoid bias in estimates, we use panel data from different income groups of urban residents to estimate parameter, then we can have a comparison of the cross section in the premise of parameter estimation being correct. After the estimation of the different groups’ welfare cost of inflation, we can draw the following two conclusions:(1) The actual welfare cost of inflation is very small, not as big as we can think;(2) There are some differences in inflation welfare cost of different income groups: in addition to the lowest income groups, welfare costs is decreasing with income levels increase. This shows that the inflation rate is an important factor affecting welfare cost of inflation, but not the only factor.In essence, the difference of the welfare cost is influenced by many factors, such as consumption capacity, production capacity, inflation expectations and our financial system. In general, compared with the lower-middle groups, the high-income groups has a higher production capacity and consumption capacity, their inflation expectations are more timely, accurate, so when there is inflation, they are able to find more methods to reduce cost. Meanwhile, due to our financial development is relatively backward, the financial system is not perfect, resulting in less financial products to invest. So most residents choose bank deposits as the main means of preservation. So when there is inflation, the purchasing power of bank deposits decline, resulting in welfare costs, and the more bank deposits are, the greater welfare costs are. This also explains why the lowest income groups have less welfare costs.Finally, based on the measurement results, the paper finds out the possible causes of the differences of welfare cost. And in accordance with China’s actual situation, the paper makes several recommendations to improve the welfare level of our country and reduce the difference of welfare cost.