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Inflation and welfare in long-run equilibrium with firm dynamics

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  • Janiak, Alexandre

    (University of Chile and IZA)

  • Monteiro, Paulo Santos

    (University of Warwick)

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 infiation 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 University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 910.

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Date of creation: 2009
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Handle: RePEc:wrk:warwec:910

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  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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