Inflation and Welfare in Long-Run Equilibrium with Firm Dynamics
AbstractWe 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, when the period over which the cash-in-advance constraint is binding is one quarter, an annual inflation rate of 10 percent leads to a decrease in the steady-state average productivity of roughly 0.5 percent compared to the optimum's steady-state. This decrease in productivity is not innocuous: it leads to a doubling of the welfare cost of inflation.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4559.
Length: 43 pages
Date of creation: Nov 2009
Date of revision:
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Other versions of this item:
- Alexandre Janiak & Paulo Santos Monteiro, 2011. "Inflation and Welfare in Long‐Run Equilibrium with Firm Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(5), pages 795-834, 08.
- Alexandre Janiak & Paulo Santos Monteiro, 2009. "Inflation and welfare in long-run equilibrium with firm dynamics," Documentos de Trabajo 261, Centro de Economía Aplicada, Universidad de Chile.
- Janiak, Alexandre & Monteiro, Paulo Santos, 2009. "Inflation and welfare in long-run equilibrium with firm dynamics," The Warwick Economics Research Paper Series (TWERPS) 910, University of Warwick, Department of Economics.
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-11-27 (All new papers)
- NEP-DGE-2009-11-27 (Dynamic General Equilibrium)
- NEP-MAC-2009-11-27 (Macroeconomics)
- NEP-MON-2009-11-27 (Monetary Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Inflation and Welfare in Long-Run Equilibrium with Firm Dynamics
by Christian Zimmermann in NEP-DGE blog on 2009-11-29 17:07:09
- Henning Weber, 2012. "The Optimal Inflation Rate and Firm-Level Productivity Growth," Kiel Working Papers 1773, Kiel Institute for the World Economy.
- Weber, Henning, 2013. "Learning By Doing in New Firms and the Optimal Rate of Inflation," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79761, Verein für Socialpolitik / German Economic Association.
- Alexandre Janiak, 2010. "Structural unemployment and the regulation of product market," Documentos de Trabajo 274, Centro de Economía Aplicada, Universidad de Chile.
- Janiak, Alexandre, 2013. "Structural unemployment and the costs of firm entry and exit," Labour Economics, Elsevier, vol. 23(C), pages 1-19.
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