INFLATION AND VARIETY

Mei Dong ()

International Economic Review, 2010, vol. 51, issue 2, 401-420

Abstract: Economies undergoing high inflation often experience a reduction of product variety in the marketplace. Existing models study how inflation affects quantity, but very few have studied how inflation affects variety. In a monetary model with explicit microfoundations, I analyze how inflation affects variety as well as quantity. I consider two pricing mechanisms-bargaining and price posting with directed search. I show that inflation reduces both quantity and variety under both pricing mechanisms. Quantitatively, the model implies that the total welfare cost of 10% inflation ranges from 4.77% to 8.4% under bargaining and is 1.52% under price posting. Copyright (2010) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2010
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