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Inflation and Welfare in Long‐Run Equilibrium with Firm Dynamics

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  • ALEXANDRE JANIAK
  • PAULO SANTOS MONTEIRO

Abstract

We analyze the welfare cost of inflation in a model with cash-in-advance constraints and an endogenous distribution of establishments' productivities. Inflation distorts aggregate productivity through firm entry dynamics. The model is calibrated to the United States economy and the long-run equilibrium properties are compared at low and high inflation. We find that increasing the annual inflation rate by 10 percentage points above the average rate in the U.S. would result in a fall in average productivity of roughly 1.3 percent. This decrease in productivity is not innocuous: it is responsible for about one half of the welfare cost of inflation.

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Bibliographic Info

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

Volume (Year): 43 (2011)
Issue (Month): 5 (08)
Pages: 795-834

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Handle: RePEc:mcb:jmoncb:v:43:y:2011:i:5:p:795-834

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

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Inflation and Welfare in Long-Run Equilibrium with Firm Dynamics
    by Christian Zimmermann in NEP-DGE blog on 2009-11-29 17:07:09
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Cited by:
  1. Alexandre Janiak, 2010. "Structural unemployment and the regulation of product market," Documentos de Trabajo 274, Centro de Economía Aplicada, Universidad de Chile.
  2. Henning Weber, 2012. "The Optimal Inflation Rate and Firm-Level Productivity Growth," Kiel Working Papers 1773, Kiel Institute for the World Economy.

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