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

Anbarci, Nejat, Dutu, Richard and Feltovich, Nick 2015, Inflation tax in the lab: a theoretical and experimental study of competitive search equilibrium with inflation, Journal of economic dynamics & control, vol. 61, pp. 17-33.

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Title Inflation tax in the lab: a theoretical and experimental study of competitive search equilibrium with inflation
Author(s) Anbarci, NejatORCID iD for Anbarci, Nejat orcid.org/0000-0001-5952-8086
Dutu, Richard
Feltovich, Nick
Journal name Journal of economic dynamics & control
Volume number 61
Start page 17
End page 33
Total pages 17
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2015-09-18
ISSN 0165-1889
Keyword(s) Money
Directed search
Posted price
Welfare loss
Friction
Experiment
Summary 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–theoreticfoundation to Rocheteau and Wright(2005)'s competitive search monetary equilibrium, is used to derive theoretical propositions regarding the effects of inflation in thisenvironment, 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%and5%, 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.
Language eng
Field of Research 140212 Macroeconomics (incl Monetary and Fiscal Theory)
Socio Economic Objective 910107 Macro Labour Market Issues
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2015, Elsevier
Persistent URL http://hdl.handle.net/10536/DRO/DU:30079063

Document type: Journal Article
Collections: School of Accounting, Economics and Finance
2018 ERA Submission
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