The Misallocation Cost of Inflation: A Sufficient Statistics Approach

Klaus Adam, Andrey Alexandrov and Henning Weber

No 21423, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The misallocation costs associated with different aggregate inflation rates can be estimated from micro price data via a set of sufficient statistics. We show that this works for a broad class of price-setting models and in the presence of unobserved product-level heterogeneity in pricing frictions and flexible prices. Applying the sufficient statistics approach to the micro price data underlying the U.K. consumer price index, we find large misallocation costs: aggregate productivity falls by about 1% if aggregate inflation is 8 percentage points above or below its optimal rate of 1.8%. Our findings provide important lessons for the calibration of sticky-price models: standard calibration targets can be uninformative about the sufficient statistics characterizing misallocation costs. To correctly capture these costs, models should be directly calibrated to the sufficient statistics that we uncover.

JEL-codes: E31 E58 (search for similar items in EconPapers)
Date: 2026-04
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