Work

Inflation and Welfare in Long-Run Equilibrium with Firm Dynamics

Year: 2011

Type: article

Abstract: We analyze the welfare cost of inflation in a model with a cash-in-advance constraint and an endogenous distribution of establishments' productivities. Inflation distorts aggregate productivity through firm entry dynamics. The model is calibrated to the U.S. economy and the long-run equilibrium properties are compared at low and high inflation. When the period over which the cash-in-advance constraint is binding is one quarter, an annual inflation rate of 10% leads to a decrease in average productivity of roughly 0.5% compared to the optimum. This decrease is not innocuous: it leads to a doubling of the welfare cost of inflation.

Source: Journal of money credit and banking

DOI: 10.1111/j.1538-4616.2011.00398.x

Authors: ALEXANDRE JANIAK, PAULO SANTOS MONTEIRO

Institutions: University of Chile, University of Warwick

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: bronze

Funder: Economic and Social Research Council