Inflation and Welfare in Long-Run Equilibrium with Firm Dynamics

Alexandre Janiak and Paulo Santos Monteiro ()
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Paulo Santos Monteiro: University of Warwick

No 4559, IZA Discussion Papers from Institute of Labor Economics (IZA)

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, when the period over which the cash-in-advance constraint is binding is one quarter, an annual inflation rate of 10 percent leads to a decrease in the steady-state average productivity of roughly 0.5 percent compared to the optimum's steady-state. This decrease in productivity is not innocuous: it leads to a doubling of the welfare cost of inflation.

Keywords: inflation; productivity; firm dynamics; welfare (search for similar items in EconPapers)
JEL-codes: E40 E50 L16 O40 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2009-11
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Published - published in: Journal of Money, Credit and Banking, 2011, 43 (5), 795 - 834

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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)
Working Paper: Inflation and welfare in long-run equilibrium with firm dynamics (2009)
Working Paper: Inflation and welfare in long-run equilibrium with firm dynamics (2009)
Working Paper: Inflation and welfare in long-run equilibrium with firm dynamics (2009)
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