Skip to main content

Research Repository

Advanced Search

Inflation tax in the lab: a theoretical and experimental study of competitive search equilibrium with inflation

Anbarci, N.; Dutu, R.; Feltovich, N.

Inflation tax in the lab: a theoretical and experimental study of competitive search equilibrium with inflation Thumbnail


Authors

R. Dutu

N. Feltovich



Abstract

In this paper we measure the effect of the inflation tax on economic activity and welfare within a controlled setting. To do so, we develop a model of price posting and monetary exchange with inflation and finite populations. The model, which provides a game–theoretic foundation to Rocheteau and Wright (2005)׳s competitive search monetary equilibrium, is used to derive theoretical propositions regarding the effects of inflation in this environment, which we test with a laboratory experiment that closely implements the theoretical framework. We find that the inflation tax is harmful – with cash holdings, production and welfare all falling as inflation rises – and that its effect is relatively larger at low inflation rates than at higher rates. For instance, for inflation rates between 0% and 5%, welfare in the two markets we consider (2[seller]×2[buyer] and 3×2) falls by roughly 1 percent for each percentage–point rise in inflation, compared with 0.4 percent over the range from 5% to 30%. Our findings lead us to conclude that the impact of the inflation tax should not be underestimated, even under low inflation.

Journal Article Type Article
Acceptance Date Sep 9, 2015
Online Publication Date Sep 18, 2015
Publication Date Sep 18, 2015
Deposit Date Aug 16, 2018
Publicly Available Date Aug 29, 2018
Journal Journal of Economic Dynamics and Control
Print ISSN 0165-1889
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 61
Pages 17-33
DOI https://doi.org/10.1016/j.jedc.2015.09.005
Public URL https://durham-repository.worktribe.com/output/1322783

Files





You might also like



Downloadable Citations