The Welfare Cost Of Inflation In China

The impact of inflation on the economy is not just an economic phenomenon that any economy cannot escape, but also it is the issue that the governments and economists have been concerning the most. The economists have tried a variety of methods to study on the problem of inflation. In the course of the study, they find that one of the dominant factors to influence inflation is currency which is on intimate terms with the emergence of welfare cost of inflation. As the continued rise in prices, the inflation occurs and the currency devalued, so did the real purchasing power. It will cause great social welfare cost when the level of the actual social welfare cannot measure up to the due level. Since the inflation influences the economic development and even causes damage to give welfare cost, the economists attempt to study quantitatively on the welfare cost that the inflation leads to base on the theoretical foundation-Money Demand Function, combining with interest rate, GDP and other indicators as the basis for measuring the level of socioeconomic development.On the basis of the previous studies, this thesis estimates the domestic welfare cost that the inflation leads to by applying to the Welfare Trigonometry Theory by Bailey (1956) and the MIU Model basing on the compensation method of variable, and the obtained results are compared. In the initial stage, this thesis introduces the Welfare Triangle Method and the approach of Money-In-the-Utility Model; at the same time deducing the required model. Then, the author chooses the economic data from the first season of1996to the fourth season of2013, and then estimates the welfare loss of inflation that calculated from those two models respectively, and carrying on the comparison. Under the guidance of Welfare Triangle Method, when the effective interest rate is3%and the inflation rate is10%, the welfare cost of inflation under the double logarithmic monetary demand function is4.782%of the total amount of GDP. Under the framework of Sidrauski (1967), the MIU Model is taken during the process of welfare cost of inflation estimating. When performing the double logarithmic monetary demand function with the inflation rate amount of10%, the domestic welfare cost of inflation is5.5069%of the total GDP amount.Therefore, the consequence that inflation brings to domestic economic is fatal and the welfare cost of inflation cannot be neglect. This research found that when adopting the double logarithmic monetary demand function, the result acquired from performing calculation through MIU model exceeds the one acquired from performing calculation through Welfare Triangle Method. In addition, this discrepancy will expand as the increase of Nominal Interest Rate.