@techreport{NBERw4873,
 title = "Credit Markets and the Welfare Costs of Inflation",
 author = "Jose De Gregorio and Federico Sturzenegger",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "4873",
 year = "1994",
 month = "October",
 URL = "http://www.nber.org/papers/w4873",
 abstract = {We construct a simple model in which high inflation imposes welfare costs because it affects the ability of the financial sector to screen between high and low cost producers.  Consumers search for a low price and inflation reduces the incentives to search, resulting in an increase in the demand of high cost producers.  We show that beyond a certain level of inflation there is a switch from a separating equilibrium to a pooling equilibrium, where financial institutions become unable to distinguish among clients.  In this pooling equilibrium a larger share of credit is allocated to less efficient firms.},
}