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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27303
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| Title: | Inflation, Output, and Welfare |
| Authors: | Lagos, Ricardo
Rocheteau, Guillaume |
| Issue Date: | Apr-2004 |
| Series/Report no.: | S-MF-04-07 |
| 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. |
| URI: | http://hdl.handle.net/2451/27303 |
| Appears in Collections: | Macro Finance
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