The Misallocation of Resources of Anticipated Inflation
This paper analyzes the effects of anticipated inflation on the resource allocations between production and financial services. We develop a model with heterogeneous workers and two sectors economy. A manufacturing sector producing a final composite good and a financial sector providing monetary management services for manufacturers. Workers in this economy are heterogeneous in their productivity and are free to move between the two sectors. Hence workers with high productivity in the financial sector choose to work in the financial sector, where they can earn high wages, while workers with low productivity prefer to work in the manufacturing sector. In equilibrium, the allocation of workers between the two sectors, i.e., the size of each sector depends, among other factors, on the inflation rate. Higher inflation increases the marginal revenues of financial workers and decrease the marginal revenues of production workers. As a consequence, resources are shifted from the manufacturing sector to the financial sector. That is, the share of the financial services in output increases and production (output) decreases. The resulting decline in manufacturing sector output reduces consumption opportunities and represents costs of inflation. To estimate the change in the production structure and, thus, the costs of inflation we analyze data from 28 countries which had some notable inflation history during the period 1972-1995. We find strong support for the hypothesis that higher inflation increases the share of the financial sector output and employment relative to the manufacturing sector.
|Date of creation:||06 Jun 1997|
|Date of revision:|
|Note:||Type of Document - WordPerfect; prepared on IBM PC ; to print on HP; pages: 27 ; figures: included|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
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.:
- Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
- Cooley, T.F. & Hansen, G.D., 1988.
"The Inflation Tax In A Real Business Cycle Model,"
88-05, Rochester, Business - General.
- Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers 496, UCLA Department of Economics.
- Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers 155, University of Rochester - Center for Economic Research (RCER).
- Robert E. Lucas Jr. & Nancy L. Stokey, 1984.
"Money and Interest in Cash-In-Advance Economy,"
628, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 5-41, January.
- Cooley, T.F. & Hansen, G.D., 1991.
"The Welfare Costs of Moderate Inflations,"
RCER Working Papers
266, University of Rochester - Center for Economic Research (RCER).
- Cooley, Thomas F & Hansen, Gary D, 1991. "The Welfare Costs of Moderate Inflations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 483-503, August.
- Thomas F. Cooley & Gary D. Hansen, 1991. "The welfare costs of moderate inflations," Proceedings, Federal Reserve Bank of Cleveland, pages 483-518.
- Stanley Fischer & Franco Modigliani, 1978.
"Towards an understanding of the real effects and costs of inflation,"
Review of World Economics (Weltwirtschaftliches Archiv),
Springer, vol. 114(4), pages 810-833, December.
- Stanley Fischer & Franco Modigliani, 1978. "Towards An Understanding of the Real Effects and Costs of Inflation," NBER Working Papers 0303, National Bureau of Economic Research, Inc.
- Driffill, John & Mizon, Grayham Ernest & Ulph, Alistair Mitchell, 1989.
"Costs of Inflation,"
CEPR Discussion Papers
293, C.E.P.R. Discussion Papers.
- Hahn, Frank, 1990. "On Inflation," Oxford Review of Economic Policy, Oxford University Press, vol. 6(4), pages 15-25, Winter.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:9706003. 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: (EconWPA)
If references are entirely missing, you can add them using this form.