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Inflation and welfare in long-run equilibrium with firm dynamics

Author

Listed:
  • Janiak, Alexandre

    (University of Chile and IZA)

  • Monteiro, Paulo Santos

    (University of Warwick)

Abstract

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.

Suggested Citation

  • Janiak, Alexandre & Monteiro, Paulo Santos, 2009. "Inflation and welfare in long-run equilibrium with firm dynamics," The Warwick Economics Research Paper Series (TWERPS) 910, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:910
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    File URL: https://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2009/twerp_910.pdf
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    References listed on IDEAS

    as
    1. Rosefielde, Steven & Pfouts, Ralph W., 1995. "Neoclassical Norms and the Valuation of National Product in the Soviet Union and Its Postcommunist Successor States," Journal of Comparative Economics, Elsevier, vol. 21(3), pages 375-389, December.
    2. Steven Rosefielde, 2005. "Tea Leaves and Productivity: Bergsonian Norms for Gauging the Soviet Future," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 47(2), pages 259-273, June.
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    Cited by:

    1. Janiak, Alexandre, 2013. "Structural unemployment and the costs of firm entry and exit," Labour Economics, Elsevier, vol. 23(C), pages 1-19.
    2. Alexandre Janiak, 2010. "Structural unemployment and the regulation of product market," Documentos de Trabajo 274, Centro de Economía Aplicada, Universidad de Chile.
    3. Weber, Henning, 2013. "Learning By Doing in New Firms and the Optimal Rate of Inflation," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79761, Verein für Socialpolitik / German Economic Association.
    4. Sofía Bauducco & Alexandre Janiak, 2015. "On the welfare cost of bank concentration," Documentos de Trabajo 321, Centro de Economía Aplicada, Universidad de Chile.
    5. Weber, Henning, 2012. "The optimal inflation rate and firm-level productivity growth," Kiel Working Papers 1773, Kiel Institute for the World Economy (IfW).
    6. Weber, Henning, 2015. "Innovation and the Optimal Rate of Inflation," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113087, Verein für Socialpolitik / German Economic Association.

    More about this item

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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