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Superneutrality and the welfare effects of inflation

Listed author(s):
  • Guillaume Rocheteau
  • Ricardo Lagos

This paper studies the long-run effects of anticipated inflation on output and welfare within a search-theoretic framework. We allow money-holders to choose the intensities with which they search for trading partners, so the frequency of trades is endogenous. We consider the standard pricing mechanism for search models, i.e., ex-post bargaining, as well as two notions of competitive pricing. If prices are bargained over ex-post, an increase in inflation reduces buyers' search intensities, aggregate output and welfare. Alternatively, if agents are assumed to be price-takers and prices are such that markets clear, it is possible for a mild inflation to increase search intensities, output, velocity and welfare. The equilibrium is generically inefficient under either of these two pricing mechanisms. Finally, if prices are posted and buyers can direct their search (competitive search), buyers' search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates. The Friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive output effect for low inflation rates

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 93.

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Date of creation: 2004
Handle: RePEc:red:sed004:93
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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