Measures of the Welfare Cost of Ination: A Complete Ordering

This paper presents three contributions to the literature on the welfare cost of ination. First, it introduces a new sensible way of measuring this cost- that of a compensating variation in consumption or income, instead of the equivalent variation notion that has been extensively used in empirical and theoretical research during the past \u85fty years. We \u85nd this new measure to be interestingly related to the proxy measure of the shopping-time welfare cost of ination introduced by Simonsen and Cysne (2001). Secondly, it discusses for which money-demand functions this and the shopping-time measure can be evaluated in an economically meaningful way. And, last but not least, it completely orders a comprehensive set of measures of the welfare cost of ination for these money-demand speci\u85cations. All of our results are extended to an economy in which there are many types of monies present, and are illustrated with the log-log money-demand speci\u85cation.