Inflation and the Informativeness of Prices / Laurence Ball, David Romer.

Format:

Book

Author/Creator:

Ball, Laurence.

Contributor:

National Bureau of Economic Research.

Romer, David.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4267.

NBER working paper series no. w4267

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1993.

Summary:

This paper studies the welfare effects of the relative price variability arising from inflation. When agents interact in anonymous markets, with customers buying from new suppliers each period, relative price variability benefits customers and cannot harm suppliers substantially. But if customers and suppliers form long-term relationships, prices have an informational role: a potential customer uses current prices as signals of future prices. Inflation reduces the informativeness of current prices, causing customers to make costly mistakes about which relationships to enter. In addition, the reduced informativeness of prices makes demand less price-elastic, thereby increasing markups. Both effects can be quantitatively significant at moderate inflation rates.

Notes:

Print version record

January 1993.