TY  - JOUR
AU  - Gregorio,Jose De
AU  - Sturzenegger,Federico
TI  - Credit Markets and the Welfare Costs of Inflation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4873
PY  - 1994
Y2  - October 1994
UR  - http://www.nber.org/papers/w4873
L1  - http://www.nber.org/papers/w4873.pdf
N1  - Author contact info:
Jose De Gregorio
Governor
Central Bank of Chile
Agustinas 1180
Santiago, Chile
Tel: 562 6702300
E-Mail: jdegrego@bcentral.cl

Federico Sturzenegger
Banco Ciudad de Buenos Aires
E-Mail: fsturzenegger@bancociudad.com.ar
AB  - 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.
ER  -