Welfare Cost of Inflation: The Role of Price Markups and Increasing Returns to Production Specialization

Juin-jen Chang, Ching-chong Lai and Chih-Hsing Liao

MPRA Paper from University Library of Munich, Germany

Abstract: Estimates of the welfare costs of moderate inflation are generally modest or small. This paper, by shedding light on increasing returns to production specialization, obtains a substantial welfare cost of 8% in an endogenous growth model of monopolistic competition with endogenous entry. Analytically, we show that the effect of inflation is aggravated (resp. alleviated) by a price markup if the degree of increasing returns to production specialization is relatively high (resp. low). Accordingly, our quantitative analysis indicates that the welfare cost of inflation exhibits an inverted U-shaped relationship with the price markup. This non-monotone is sharply in contradiction to the conventional notion. Nonetheless, the welfare cost of inflation is unambiguously increasing in the degree of increasing returns to production specialization.

Keywords: Welfare cost of inflation; price markup; increasing returns to production specialization. (search for similar items in EconPapers)
JEL-codes: E5 E52 O4 O42 (search for similar items in EconPapers)
Date: 2017-03-21
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:77753

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