Inflation, Output, and Welfare

48 Pages Posted: 30 Oct 2007

See all articles by Ricardo Lagos

Ricardo Lagos

New York University (NYU) - Department of Economics

Guillaume Rocheteau

Federal Reserve Bank of Cleveland; National University of Singapore (NUS)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2004

Abstract

This paper studies the effects of anticipated inflation on aggregate output and welfare within a search-theoretic framework. We allow money-holders to choose the intensities with which they search for trading partners, so inflation affects the frequency of trade as well as the quantity of output produced in each trade. We consider the standard pricing mechanism for search models, i.e., ex-post bargaining, as well as a notion of competitive pricing. If prices are bargained over, the equilibrium is generically inefficient and an increase in inflation reduces buyers' search intensities, output, and welfare. If prices are posted and buyers can direct their search, search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates. The Friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive effect on output for low inflation rates.

Keywords: search, money, inflation, welfare, output

JEL Classification: E40, E50

Suggested Citation

Lagos, Ricardo and Rocheteau, Guillaume, Inflation, Output, and Welfare (August 2004). FRB of Cleveland Working Paper No. 04-07. Available at SSRN: https://ssrn.com/abstract=1025603 or http://dx.doi.org/10.2139/ssrn.1025603

Ricardo Lagos

New York University (NYU) - Department of Economics ( email )

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Guillaume Rocheteau (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

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