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Inflation And Variety

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  • Mei Dong
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Abstract

Economies undergoing high inflation often experience a reduction of product variety in the marketplace. Existing models study how inflation affects quantity, but very few have studied how inflation affects variety. In a monetary model with explicit microfoundations, I analyze how inflation affects variety as well as quantity. I consider two pricing mechanisms-bargaining and price posting with directed search. I show that inflation reduces both quantity and variety under both pricing mechanisms. Quantitatively, the model implies that the total welfare cost of 10% inflation ranges from 4.77% to 8.4% under bargaining and is 1.52% under price posting. Copyright (2010) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 51 (2010)
Issue (Month): 2 (05)
Pages: 401-420

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Handle: RePEc:ier:iecrev:v:51:y:2010:i:2:p:401-420

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Cited by:
  1. Richard Dutu & Benoit Julien & Ian King, 2009. "Liquidity Constrained Competing Auctions," Department of Economics - Working Papers Series 1068, The University of Melbourne.
  2. Mei Dong, 2010. "Inflation and Unemployment in Competitive Search Equilibrium," Working Papers 10-15, Bank of Canada.
  3. Yuet-Yee Wong & Randall Wright, 2011. "Buyers, Sellers and Middlemen: Variations on Search-Theoretic Themes," 2011 Meeting Papers 374, Society for Economic Dynamics.

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