The Elusive Costs of Inflation: Price Dispersion During the U.S. Great Inflation

@article{Nakamura2016TheEC,
  title={The Elusive Costs of Inflation: Price Dispersion During the U.S. Great Inflation},
  author={Emi Nakamura and J{\'o}n Bjarni Steinsson and Patrick Sun and Daniel Villar},
  journal={ERN: Inflation \& Deflation (Topic)},
  year={2016}
}
A key policy question is: How high an inflation rate should central banks target? This depends crucially on the costs of inflation. An important concern is that high inflation will lead to inefficient price dispersion. Workhorse New Keynesian models imply that this cost of inflation is very large. An increase in steady state inflation from 0% to 10% yields a welfare loss that is an order of magnitude greater than the welfare loss from business cycle fluctuations in output in these models. We… 

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