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Inflation and welfare in long-run equilibrium with firm dynamics

  • Janiak, Alexandre

    (University of Chile and IZA)

  • Monteiro, Paulo Santos

    (University of Warwick)

We analyze the welfare cost of inflation in a model with cash-in-advance constraints and an endogenous distribution of establishments' productivities. Inflation distorts aggregate productivity through firm entry dynamics. The model is calibrated to the United States economy and the long-run equilibrium properties are compared at low and high inflation. We find that increasing the annual infiation rate by 10 percentage points above the average rate in the U.S. would result in a fall in average productivity of roughly 1.3 percent. This decrease in productivity is not innocuous : it is responsible for about one half of the welfare cost of inflation.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2009/twerp_910.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 910.

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Date of creation: 2009
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Handle: RePEc:wrk:warwec:910
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