Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/35906
Authors: 
Janiak, Alexandre
Monteiro, Paulo Santos
Year of Publication: 
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

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