06
Nov
2019
Research Seminar Series (RSS)
Inflation and Welfare in the laboratory
with Daniela Puzzello (Indiana University)
Maison des Sciences Humaines
11, Porte des Sciences
L-4366 Esch-sur-Alzette/Belval
Conference Room, 1st floor
11:00 am
12:30 pm
For inquiries:
seminars@liser.lu

Joint seminar LISER – LSF, University of Luxembourg

(with Jianet Jiang and Cathy Zhang)

We integrate theory and experimental evidence to study the effects of inflationary monetary policies on allocations and welfare. Our framework is based on the Lagos and Wright (2005) model of monetary exchange that provides a role for money as a medium of exchange. We compare a laissez-faire policy with a constant money supply and three inflationary policies with fixed money growth. In scheme one (Government Spending), the government adjusts expenditures financed through seigniorage; in scheme two (Lump Sum Transfers), the government injects new money through lump-sum transfers; and in scheme three (Proportional Transfers), the government makes transfers proportional to individual money holdings. Under all inflationary policies, theory predicts inflation is constant at the money growth rate in steady state. While the first two policies yield the same stationary equilibrium with lower welfare relative to laissez-faire, the third policy is neutral. Consistent with theory, output and welfare in the experiments are significantly lower with Government Spending relative to laissez-faire while there are no significant effects with Proportional Transfers. Our findings have implications on monetary policy  implementation and provide support for policies in line with the quantity theory.

 

Supported by the National Research Fund (FNR/RESCOM/18/12979972)

Also in this category ...