OUTPUT GAINS FROM ECONOMIC-STABILIZATION

By driving a wedge between the marginal returns to real and financial capital, inflation distorts production. The elimination of this distor tion increases both the level and rate of growth of output. First, inc reased price stability improves the utilization of capital and thus in creases the full-employment level of output in the long run. Second, t he static output gain from stabilization is captured in a simple formu la in which the gain is approximately proportional to the square of th e original inflation distortion. Third, successful stabilization incre ases the rate of growth of output per head, and not only its level, in the presence of constant returns to capital in a broad sense. Fourth, substitution of plausible parameter estimates into the simple formula e reflecting the gains from stabilization indicate that the static and dynamic output gains can be substantial. (C) 1998 Elsevier Science B. V. All rights reserved.