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Inflation And Variety

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  • Mei Dong

Abstract

Economies undergoing high inflation often experience a reduction of product variety in the marketplace. Existing models study how inflation affects quantity, but very few have studied how inflation affects variety. In a monetary model with explicit microfoundations, I analyze how inflation affects variety as well as quantity. I consider two pricing mechanisms-bargaining and price posting with directed search. I show that inflation reduces both quantity and variety under both pricing mechanisms. Quantitatively, the model implies that the total welfare cost of 10% inflation ranges from 4.77% to 8.4% under bargaining and is 1.52% under price posting. Copyright (2010) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Mei Dong, 2010. "Inflation And Variety," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(2), pages 401-420, May.
  • Handle: RePEc:ier:iecrev:v:51:y:2010:i:2:p:401-420
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    Cited by:

    1. Richard Dutu & Benoit Julien & Ian King, 2009. "Liquidity Constrained Competing Auctions," Department of Economics - Working Papers Series 1068, The University of Melbourne.
    2. Silva, Mario, 2017. "New monetarism with endogenous product variety and monopolistic competition," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 158-181.
    3. Hotchkiss, Julie L. & Moore, Robert E. & Rios-Avila, Fernando, 2017. "Family Welfare and the Cost of Unemployment," FRB Atlanta Working Paper 2017-7, Federal Reserve Bank of Atlanta.
    4. Dong, Mei, 2011. "Inflation And Unemployment In Competitive Search Equilibrium," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S2), pages 252-268, September.

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