Inflation and variety

Blackwell Publishing Limited
Publication Type:
Journal Article
International Economic Review, 2010, 51 (2), pp. 401 - 420
Issue Date:
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Economies undergoing high inflation often experience a reduction of product variety in the marketplace. Existing models study how inflation affects quantity, but very few have studied how inflation affects variety. In a monetary model with explicit microfoundations, I analyze how inflation affects variety as well as quantity. I consider two pricing mechanisms-bargaining and price posting with directed search. I show that inflation reduces both quantity and variety under both pricing mechanisms. Quantitatively, the model implies that the total welfare cost of 10% inflation ranges from 4.77% to 8.4% under bargaining and is 1.52% under price posting. © (2010) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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