Inflation and the Informativeness of Prices
This paper studies the welfare effects of the relative price variability arising from inflation. When agents interact in anonymous markets, with customers buying from new suppliers each period, relative price variability benefits customers and cannot harm suppliers substantially. But if customers and suppliers form long-term relationships, prices have an informational role: a potential customer uses current prices as signals of future prices. Inflation reduces the informativeness of current prices, causing customers to make costly mistakes about which relationships to enter. In addition, the reduced informativeness of prices makes demand less price-elastic, thereby increasing markups. Both effects can be quantitatively significant at moderate inflation rates.
|Date of creation:||Jan 1993|
|Date of revision:|
|Publication status:||published as Ball, Lawrence and N. Gregory Mankiw, "Interpreting the Correlation Between Inflation and the Skewness of Relative Prices: A Comment on Bryan and Cecchetti," Review of Economics and Statistics, Vol. 81, no. 2 (May 1999): 197-198.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
- Benabou, R. & Konieczny, J.D., 1993.
"On Inflation and Output with Costly Price Changes: A Simple Unifying Result,"
93006, Wilfrid Laurier University, Department of Economics.
- Benabou, Roland & Konieczny, Jerzy D, 1994. "On Inflation and Output with Costly Price Changes: A Simple Unifying Result," American Economic Review, American Economic Association, vol. 84(1), pages 290-97, March.
- Roland Benabou & Jerzy Konieczny, 1993. "On Inflation and Output with Costly Price Changes: A Simple Unifying Result," NBER Technical Working Papers 0135, National Bureau of Economic Research, Inc.
- Benabou, R. & Konieczny, J.D., 1991. "On Inflation and Output with CostlyPrice Changes: A Simple Unifying Result," Working papers 586, Massachusetts Institute of Technology (MIT), Department of Economics.
- Michael L. Wachter & Oliver E. Williamson, 1978. "Obligational Markets and the Mechanics of Inflation," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 549-571, Autumn.
- Naish, Howard F, 1986. "Price Adjustment Costs and the Output-Inflation Trade-off," Economica, London School of Economics and Political Science, vol. 53(210), pages 219-30, May.
- Arthur M. Okun, 1975. "Inflation: Its Mechanics and Welfare Costs," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 351-402.
- Kashyap, Anil K, 1995.
"Sticky Prices: New Evidence from Retail Catalogs,"
The Quarterly Journal of Economics,
MIT Press, vol. 110(1), pages 245-74, February.
- Anil K. Kashyap, 1990. "Sticky prices: new evidence from retail catalogs," Finance and Economics Discussion Series 112, Board of Governors of the Federal Reserve System (U.S.).
- Anil K Kashyap, 1994. "Sticky Prices: New Evidence from Retail Catalogs," NBER Working Papers 4855, National Bureau of Economic Research, Inc.
- Anil K. Kashyap, 1991. "Sticky prices: new evidence from retail catalogs," Working Paper Series, Macroeconomic Issues 91-26, Federal Reserve Bank of Chicago.
- Diamond, Peter A, 1993.
"Search, Sticky Prices, and Inflation,"
Review of Economic Studies,
Wiley Blackwell, vol. 60(1), pages 53-68, January.
- Dennis W. Carlton, 1982. "The Disruptive Effect of Inflation on the Organization of Markets," NBER Chapters, in: Inflation: Causes and Effects, pages 139-152 National Bureau of Economic Research, Inc.
- Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
- Mariano Tommasi, 1992. "The Welfare Effects of Inflation, The Consequences of Price Instability on Search Markets," UCLA Economics Working Papers 655, UCLA Department of Economics.
- Roland Benabou & Robert Gertner, 1991. "The Informativeness of Prices: Search With Learning and Cost Uncertainty," NBER Working Papers 3833, National Bureau of Economic Research, Inc.
- Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:4267. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.