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Inflation and Welfare in Long‐Run Equilibrium with Firm Dynamics

Alexandre Janiak and Paulo Santos Monteiro ()

Journal of Money, Credit and Banking, 2011, vol. 43, issue 5, 795-834

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.

Date: 2011
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https://doi.org/10.1111/j.1538-4616.2011.00398.x

Related works:
Journal Article: Inflation and Welfare in Long-Run Equilibrium with Firm Dynamics (2011)
Working Paper: Inflation and welfare in long-run equilibrium with firm dynamics (2009) Downloads
Working Paper: Inflation and welfare in long-run equilibrium with firm dynamics (2009) Downloads
Working Paper: Inflation and welfare in long-run equilibrium with firm dynamics (2009) Downloads
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