Inflation, Output, and Welfare

28 Pages Posted: 5 May 2005

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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Abstract

We study the effects of anticipated inflation on aggregate output and welfare within a search-theoretic framework. We consider two pricing mechanisms: ex post bargaining and a notion of competitive pricing. Under bargaining, 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 efficient allocation, and inflation always reduces welfare, although it can have a positive effect on output for low inflation rates.

Suggested Citation

Lagos, Ricardo and Rocheteau, Guillaume, Inflation, Output, and Welfare. International Economic Review, Vol. 46, No. 2, pp. 495-522, May 2005. Available at SSRN: https://ssrn.com/abstract=714273

Ricardo Lagos

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

269 Mercer Street, 7th Floor
New York, NY 10011
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212-998-8937 (Phone)

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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