COMPARING PARTIAL AND GENERAL EQUILIBRIUM ESTIMATES OF THE WELFARE COST OF INFLATION

Reserve banks worldwide have been moving towards zero inflation polici es. Confusion clouds the welfare cost of maintaining such inflation po licies despite the best attempts at clarification. Monetary theory res earch has shifted from partial to general equilibrium economies. This shift has left the partial equilibrium estimates of the welfare cost o f inflation below most of the general equilibrium estimates. Put on a comparable basis, partial equilibrium estimates compare more closely w ith the general equilibrium estimates. Furthermore, evidence suggests that integration under the money demand function appears applicable in general equilibrium economies. Finally, the estimates depend on the e lasticities of money demand and the underlying structural parameters.