Inflation and welfare in long-run equilibrium with firm dynamics

Arbeitspapier

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, when the period over which the cash-in-advance constraint is binding is one quarter, an annual inflation rate of 10 percent leads to a decrease in the steady-state average productivity of roughly 0.5 percent compared to the optimum's steady-state. This decrease in productivity is not innocuous: it leads to a doubling of the welfare cost of inflation.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 4559

Classification and Topics

• Classification: Wirtschaft ; Money and Interest Rates: General ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General ; Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices ; Economic Growth and Aggregate Productivity: General
• Subject: Firm dynamics ; productivity ; inflation ; welfare ; Inflation ; Unternehmensentwicklung ; Produktivität ; Markteintritt ; Wohlfahrtseffekt ; USA

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Janiak, Alexandre ; Monteiro, Paulo Santos
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/35906
• Last update: 10.03.2025, 11:42 AM CET