Bailey's measure of the welfare costs of infiation as a general-equilibrium measure

Abstract

Lucas (2000) has ShO\nl t hat Baile,\''s formula for t hc \\'elfare costs of inflatioIl caIl bc rcgardpd as an approximation to t hc gcneral-equilibriuIll IllCaSllH'S \\'hich emerge from thc Sidrauski anrl the shopping-time models, In this paper \\'c shm\' that Baile~'s mcaSllrc can bc cxactly obtairlf'd in tllf' Siclrauski geIleral-equilibri1lIn framp\\'ork under the assUIllption of quasilinpar prefpreIlC'cs, The rpslllt. based on ',heter or not \\'Palt h pffpcts are incorporatccl into t hp analysis, is also helpful in darif\'ing \\'hy Lucas' Illeasurp clerin'd from the Siclrauski model turns 01lt to be aIl upper bOllIlcl to Bailp~'s, T,,'o eXaInplcs arp used to illustratc t he main C'ondusions,