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Inflation and welfare in long-run equilibrium with firm dynamics

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Janiak, Alexandre and Santos-Monteiro, Paulo. (2011) Inflation and welfare in long-run equilibrium with firm dynamics. Journal of Money, Credit & Banking, Vol.43 (No.5). pp. 795-834. ISSN 0022-2879

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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.

Item Type: Journal Article
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Welfare economics, Inflation (Finance) -- Mathematical models, Industrial productivity -- Effect of inflation on
Series Name: Warwick economic research papers
Journal or Publication Title: Journal of Money, Credit & Banking
Publisher: Wiley-Blackwell Publishing, Inc.
Place of Publication: Coventry
ISSN: 0022-2879
Date: 15 August 2011
Volume: Vol.43
Number: No.5
Number of Pages: 46
Page Range: pp. 795-834
Identification Number: 10.1111/j.1538-4616.2011.00398.x
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Open Access
URI: http://wrap.warwick.ac.uk/id/eprint/38631

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