Credit Markets and the Welfare Costs of Inflation
We construct a simple model in which high inflation imposes welfare costs because it affects the ability of the financial sector to screen between high and low cost producers. Consumers search for a low price and inflation reduces the incentives to search, resulting in an increase in the demand of high cost producers. We show that beyond a certain level of inflation there is a switch from a separating equilibrium to a pooling equilibrium, where financial institutions become unable to distinguish among clients. In this pooling equilibrium a larger share of credit is allocated to less efficient firms.
|Date of creation:||Oct 1994|
|Date of revision:|
|Publication status:||Published as "Welfare Costs of Inflation, Seigniorage, and Financial Innovation", IMF, Vol. 38, no. 4 (1991): 675-704.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- 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.
- José De Gregorio & Federico Sturzenegger, 1997.
"Financial Markets and Inflation under Imperfect Information,"
Documentos de Trabajo
23, Centro de Economía Aplicada, Universidad de Chile.
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- De Gregorio, Jose, 1993. "Inflation, taxation, and long-run growth," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 271-298, June.
- Mariano Tommasi, 1996.
"High inflation: resource misallocations and growth effects,"
Estudios de Economia,
University of Chile, Department of Economics, vol. 23(2 Year 19), pages 157-177, December.
- Mariano Tommasi, 1993. "High Inflation: Resource Misallocations and Growth Effects," UCLA Economics Working Papers 704, UCLA Department of Economics.
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