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The Effects of Inflation on the Number of Firms and Firm Size

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  • Wu, Yangru
  • Zhang, Junxi

Abstract

A typical money and growth model generally incorporates an implicit assumption that the number of firms (or the set of goods available) is fixed. This paper attempts to investigate the implications of relaxing this assumption in a monopolistically competitive model with endogenous markup. It is found that among other effects, inflation reduces the number of firms and each firm's size; moreover, due to this new channel, inflation induces secondary effects. One direct implication is that the welfare costs of inflation in our framework are substantially higher than those documented in existing models with standard features. Our findings suggest that it is the lessening of competition that appears to be the primary driving force.

Suggested Citation

  • Wu, Yangru & Zhang, Junxi, 2001. "The Effects of Inflation on the Number of Firms and Firm Size," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 251-271, May.
  • Handle: RePEc:mcb:jmoncb:v:33:y:2001:i:2:p:251-71
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    Cited by:

    1. Juan Pérez Velasco Pavón, 2014. "Economic behavior of indigenous peoples: the Mexican case," Latin American Economic Review, Springer;Centro de Investigaciòn y Docencia Económica (CIDE), vol. 23(1), pages 1-58, December.
    2. Colciago, Andrea & Etro, Federico, 2010. "Real business cycles with Cournot competition and endogenous entry," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1101-1117, December.
    3. Chang, Cheng-wei & Lai, Ching-chong, 2012. "Markups and the number of firms in a simple model of imperfect competition," Economics Letters, Elsevier, vol. 116(3), pages 277-280.
    4. Dudley Cooke, 2016. "Optimal Monetary Policy with Endogenous Export Participation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 72-88, July.
    5. Yakita, Akira, 2004. "Elasticity of substitution in public capital formation and economic growth," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 391-408, September.
    6. Yangru Wu & Junxi Zhang, 2003. "Uniqueness and Stability of Equilibria in a Model with Endogenous Markups and Labor Supply," Annals of Economics and Finance, Society for AEF, vol. 4(1), pages 177-191, May.

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