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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Paper provided by Centro de EconomÃa Aplicada, Universidad de Chile in its series Documentos de Trabajo with number
261.
Length: Date of creation: 2009 Date of revision: Handle: RePEc:edj:ceauch:261
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