The Misallocation of Resources of Anticipated Inflation
AbstractThis paper analyzes the effects of anticipated inflation on the resource allocations between production and financial services. We develop a model with heterogeneous workers and two sectors economy. A manufacturing sector producing a final composite good and a financial sector providing monetary management services for manufacturers. Workers in this economy are heterogeneous in their productivity and are free to move between the two sectors. Hence workers with high productivity in the financial sector choose to work in the financial sector, where they can earn high wages, while workers with low productivity prefer to work in the manufacturing sector. In equilibrium, the allocation of workers between the two sectors, i.e., the size of each sector depends, among other factors, on the inflation rate. Higher inflation increases the marginal revenues of financial workers and decrease the marginal revenues of production workers. As a consequence, resources are shifted from the manufacturing sector to the financial sector. That is, the share of the financial services in output increases and production (output) decreases. The resulting decline in manufacturing sector output reduces consumption opportunities and represents costs of inflation. To estimate the change in the production structure and, thus, the costs of inflation we analyze data from 28 countries which had some notable inflation history during the period 1972-1995. We find strong support for the hypothesis that higher inflation increases the share of the financial sector output and employment relative to the manufacturing sector.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 9706003.
Length: 27 pages
Date of creation: 06 Jun 1997
Date of revision:
Note: Type of Document - WordPerfect; prepared on IBM PC ; to print on HP; pages: 27 ; figures: included
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anticipated inflation; resource allocation; financial sector.;
Find related papers by JEL classification:
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- J2 - Labor and Demographic Economics - - Demand and Supply of Labor
- E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
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