Date of Award
Doctor of Philosophy
The welfare costs of anticipated inflation are analyzed on the basis of the roles money plays in the economy. The traditional account of Bailey (1956) and Friedman (1969) are incomplete. When money is a store of value inflation distorts the optimal portfolio composition and the intertemporal allocation of consumption. When money is a medium of exchange, inflation is a tax on market activities. It reduces the trading efficiency of the economy and so shrinks agents' opportunity sets. When money is used as a unit of account, accounting costs rise. The frequency of price changes may, but need not, increase. The productive efficiency of the economy is reduced as the variability of relative prices increases with inflation. The optimal rate of inflation is negative but greater than minus the real interest rate, as Friedman (1969) suggested.;When price changing is costly, inflation has real effects as it affects the time path of real prices. They depend on the forms of the profit and demand functions. A partial equilibrium analysis shows that, with some specifications, inflation increases output and employment, thus offering a Phillips-type tradeoff. As long as the marginal product of labor is decreasing, labor productivity unambiguously falls.;Welfare effects are analyzed in a general equilibrium, choice theoretic, rational expections model in which optimal pricing policies of many menu cost firms are consistently aggregated. Inflation increases relative price variability, a result known from partial equilibrium models. It reduces profits and aggregate spending. Output and leisure fall while the real wage increases. Welfare is reduced even though the resource cost of price changes need not rise. The real effects of inflation are due to increased relative price variability, which leads to higher output variance. The productive efficiency of the economy falls and so inflation reduces its production-possibilities set.
Konieczny, Jerzy Dariusz, "Inflation And Costly Price Adjustment" (1987). Digitized Theses. 1632.