Consideration of the Welfare Cost of Inflation with General Equilibrium Model Approach

In this paper we studied the welfare cost of inflation. Therefore, to meet this end, we use a three section new Keynesian model of the dynamic Stochastic General equilibrium. Inflation is a complex phenomenon that has destructive effects on society. In this model we aim to solve linear log and non linear form by using annual data for Iran. The empirical findings indicate that welfare cost of inflation is equivalent to 5.5 percent of GDP for 10 percent of inflation, and we find that for a model with fullindexation the welfare cost of inflation is equivalent to 3.7 percent decrease in GDP. Moreover, results show that fluctuation in sustainable level of inflation leads to a decrease in the social welfare.

Keywords:

Inflation , Welfare cost , DSGE , New Keynesian