Inflation and Welfare in Long-Run Equilibrium with Firm Dynamics

TY - JOUR

T1 - Inflation and Welfare in Long-Run Equilibrium with Firm Dynamics

AU - Janiak, Alexandre

AU - Monteiro, Paulo Santos

PY - 2011/8

Y1 - 2011/8

N2 - 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.

AB - 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.

KW - Firm Dynamics

KW - Productivity

KW - Inflation

KW - Welfare

UR - http://www.scopus.com/inward/record.url?scp=79960578675&partnerID=8YFLogxK

U2 - 10.1111/j.1538-4616.2011.00398.x

DO - 10.1111/j.1538-4616.2011.00398.x

M3 - Article

SN - 0022-2879

VL - 43

SP - 795

EP - 834

JO - Journal of Money Credit and Banking

JF - Journal of Money Credit and Banking

IS - 5

ER -