Inflation, Output, and Welfare

45 Pages Posted: 12 Nov 2008

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)

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Date Written: April 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.

Suggested Citation

Lagos, Ricardo and Rocheteau, Guillaume, Inflation, Output, and Welfare (April 2004). NYU Working Paper No. S-MF-04-07. Available at SSRN: https://ssrn.com/abstract=1300198

Ricardo Lagos (Contact Author)

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Guillaume Rocheteau

Federal Reserve Bank of Cleveland ( email )

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National University of Singapore (NUS) ( email )

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