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Inflation, Output, and Welfare in the Laboratory

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  • Jiang, Janet Hua
  • Puzzello, Daniela
  • Zhang, Cathy
Abstract
We develop an experimental framework to investigate the quantity theory of money and the real effects of inflation in an economy where money serves as a medium of exchange. We test the classical view that inflation reduces output and welfare by taxing monetary exchange. Inflation is engineered by constant money growth where newly-issued money is injected in one of three ways: to finance government spending, lump-sum transfers, or proportional transfers. Experimental results largely support theoretical predictions. Higher money growth leads to higher inflation. Output and welfare are significantly lower with government spending, output is significantly lower with lump-sum transfers, while there are no significant real effects with proportional transfers. A deviation from theory is that the detrimental effect of money growth depends on the implementation scheme and is stronger with government spending relative to lump-sum transfers.

Suggested Citation

  • Jiang, Janet Hua & Puzzello, Daniela & Zhang, Cathy, 2023. "Inflation, Output, and Welfare in the Laboratory," European Economic Review, Elsevier, vol. 152(C).
  • Handle: RePEc:eee:eecrev:v:152:y:2023:i:c:s0014292122002318
    DOI: 10.1016/j.euroecorev.2022.104351
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    More about this item

    Keywords

    Money; Monetary policy; Inflation; Experimental macroeconomics;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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