The Misallocation Costs of Inflation: A Sufficient Statistics Approach

Klaus Adam, Andrey Alexandrov and Henning Weber

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

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 suf ficient 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.

Keywords: inflation; misallocation; sufficient statistics (search for similar items in EconPapers)
JEL-codes: E31 E58 (search for similar items in EconPapers)
Pages: 83
Date: 2026-05
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