Inflation and the Informativeness of Prices

Laurence Ball and David Romer

No 4267, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the welfare effects of the relative price variability arising from inflation. When agents interact in anonymous markets, with customers buying from new suppliers each period, relative price variability benefits customers and cannot harm suppliers substantially. But if customers and suppliers form long-term relationships, prices have an informational role: a potential customer uses current prices as signals of future prices. Inflation reduces the informativeness of current prices, causing customers to make costly mistakes about which relationships to enter. In addition, the reduced informativeness of prices makes demand less price-elastic, thereby increasing markups. Both effects can be quantitatively significant at moderate inflation rates.

JEL-codes: E31 (search for similar items in EconPapers)
Date: 1993-01
Note: ME EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published as Ball, Lawrence and N. Gregory Mankiw, "Interpreting the Correlation Between Inflation and the Skewness of Relative Prices: A Comment on Bryan and Cecchetti," Review of Economics and Statistics, Vol. 81, no. 2 (May 1999): 197-198.
Published as Journal of Money, Credit and Banking, vol. 35, no. 2, (April 2003), pp. 177-196

Downloads: (external link)
http://www.nber.org/papers/w4267.pdf (application/pdf)

Related works:
Journal Article: Inflation and the Informativeness of Prices (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4267

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w4267

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().