Inflation and Welfare in Long-Run Equilibrium with Firm Dynamics

Alexandre Janiak, Paulo Santos Monteiro

Research output: Contribution to journalArticlepeer-review


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.

Original languageEnglish
Pages (from-to)795-834
Number of pages40
JournalJournal of Money Credit and Banking
Issue number5
Publication statusPublished - Aug 2011


  • Firm Dynamics
  • Productivity
  • Inflation
  • Welfare

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