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Inflation and welfare in long-run equilibrium with firm dynamics

Alexandre Janiak and Paulo Santos Monteiro ()

No 261, Documentos de Trabajo from Centro de Economía Aplicada, Universidad de Chile

Abstract: We analyze the welfare cost of inflation in a model with cash-in-advance constraints and an endogenous distribution of establishments' productivities. Inflation distorts aggregate productivity through firm entry dynamics. The model is calibrated to the United States economy and the long-run equilibrium properties are compared at low and high inflation. We find that increasing the annual inflation rate by 10 percentage points above the average rate in the U.S. would result in a fall in average productivity of roughly 1.3 percent. This decrease in productivity is not innocuous: it is responsible for about one half of the welfare cost of inflation.

Date: 2009
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: Inflation and Welfare in Long-Run Equilibrium with Firm Dynamics (2011)
Journal Article: Inflation and Welfare in Long‐Run Equilibrium with Firm Dynamics (2011) 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
Working Paper: Inflation and welfare in long-run equilibrium with firm dynamics (2009) Downloads
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