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Inflation and the Informativeness of Prices

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  • Ball, Laurence
  • Romer, David

Abstract

This paper studies the welfare effects of the relative-price variability arising from inflation. If customers and suppliers form long-term relationships, prices have an informational role: a potential customer uses current prices as signals of future prices. Inflation reduces the informativeness of current prices, causing customers to make costly mistakes about which relationships to enter. In addition, the reduced informativeness of prices makes demand less price elastic, thereby increasing markups. Both effects can be quantitatively significant at moderate inflation rates.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 35 (2003)
Issue (Month): 2 (April)
Pages: 177-96

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Handle: RePEc:mcb:jmoncb:v:35:y:2003:i:2:p:177-96

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Roland Benabou & Jerzy Konieczny, 1993. "On Inflation and Output with Costly Price Changes: A Simple Unifying Result," NBER Technical Working Papers 0135, National Bureau of Economic Research, Inc.
  2. Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
  3. Kashyap, Anil K, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 245-74, February.
  4. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  5. Diamond, Peter A, 1993. "Search, Sticky Prices, and Inflation," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 53-68, January.
  6. Michael L. Wachter & Oliver E. Williamson, 1978. "Obligational Markets and the Mechanics of Inflation," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 549-571, Autumn.
  7. Arthur M. Okun, 1975. "Inflation: Its Mechanics and Welfare Costs," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 351-402.
  8. Mariano Tommasi, 1992. "The Welfare Effects of Inflation, The Consequences of Price Instability on Search Markets," UCLA Economics Working Papers 655, UCLA Department of Economics.
  9. Roland Benabou & Robert Gertner, 1991. "The Informativeness of Prices: Search With Learning and Cost Uncertainty," NBER Working Papers 3833, National Bureau of Economic Research, Inc.
  10. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
  11. Dennis W. Carlton, 1982. "The Disruptive Effect of Inflation on the Organization of Markets," NBER Chapters, in: Inflation: Causes and Effects, pages 139-152 National Bureau of Economic Research, Inc.
  12. Naish, Howard F, 1986. "Price Adjustment Costs and the Output-Inflation Trade-off," Economica, London School of Economics and Political Science, vol. 53(210), pages 219-30, May.
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