Economics, Econometrics and Finance
4 years ago

Inflation boosts trade intensity and frequency, but deflation remains optimal.

2004 Meeting Papers
Greasing the Wheels of Trade: Inflation with Menu Costs and Search Frictions
Guillaume Rocheteau, Ben R. Craig

Paper Summary

The article explores how inflation affects trade in a monetary economy with sticky prices and search frictions. In a decentralized market, inflation can increase trade frequency and intensity, leading to better welfare and output compared to price stability. However, the optimal policy suggests deflation.

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