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Title:Inflation and welfare in long-run equilibrium with firm dynamics PDF Logo
Authors:Janiak, Alexandre
Monteiro, Paulo Santos
Issue Date:2009
Series/Report no.:IZA Discussion Papers 4559
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.
Subjects:Firm dynamics
productivity
inflation
welfare
JEL:E40
E50
L16
O40
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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