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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/27303

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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