Skip to main content

The Costs and Benefits of Inflation: Evaluation for Japan's Economy

May 2007
Hitoshi Fuchi*1
Nobuyuki Oda*2
Hiroshi Ugai*3

Click on wp07e10.pdf to download the full text.

Abstract

This paper quantitatively evaluates a steady-state inflation rate that is considered desirable from the perspective of social welfare, using a model describing the Japanese economy.

Specifically, it begins by setting out points concerning the costs and benefits that accompany inflation. We build a model capable of evaluating the effects, on social welfare, of several of these points: the opportunity cost of holding money, the zero lower bound on nominal interest rates, price stickiness and the downward wage rigidity. Building on this, we conduct a stochastic simulation that quantitatively evaluates the social loss with different steady-state inflation rates. We also analyze the range of changes in the steady-state inflation rate that minimizes the social loss when we change the model settings.

Key words:
Inflation; Social loss; Monetary policy; Zero lower bound on nominal interest rates; Downward wage rigidity; Price stickiness; Opportunity cost of holding money

JEL classification: E31, E52, E58

We would like to thank Kosuke Aoki (London School of Economics), seminar participants at the Bank of Canada, and many colleagues at the Bank of Japan, including Hiroshi Fujiki, Ippei Fujiwara, Takeshi Kimura, Shigenori Shiratsuka, Tomohiro Sugo, Kozo Ueda, and Isao Yamamoto, for their helpful comments. The opinions expressed here, as well as any remaining errors, belong to the authors and should not be ascribed to the Bank of Japan or the Monetary Affairs Department.

  • *1 Monetary Affairs Department, Bank of Japan
    E-mail: hitoshi.fuchi@boj.or.jp
  • *2 Monetary Affairs Department, Bank of Japan
    E-mail: nobuyuki.oda@boj.or.jp
  • *3 Monetary Affairs Department (currently, Okayama Branch), Bank of Japan
    E-mail: hiroshi.ugai@boj.or.jp

Notice

Papers in the Bank of Japan Working Paper Series are circulated in order to stimulate discussion and comments. Views expressed are those of authors and do not necessarily reflect those of the Bank.

If you have any comment or question on the working paper series, please contact each author.

When making a copy or reproduction of the content for commercial purposes, please contact the Public Relations Department (webmaster@info.boj.or.jp) at the Bank in advance to request permission. When making a copy or reproduction, the source, Bank of Japan Working Paper Series, should explicitly be credited.