ABSTRACT
To understand the macroeconomic aspects of inflation, it is necessary to investigate what happens ai the microeconomic level. Inflation affects microeconomic interaction between firms and consumers in a substantial way. Firms choose pricing rules that affect consumer’s search. The search is realized across firms and through time. The theory does not provide a clear answer to the effect of inflation on welfare. On one hand, because of adjustment costs, a higher inflation is associated with a higher dispersion of prices, making search more attractive. On the other hand, it deteriorates the information content of prices, reducing the ability of consumers of taking advantage of search. This article surveys the very recent contributions to this field. It argues that although we can get important insights from those articles, none of them provide a satisfactory answer to the question that has puzzled macroeconomists for more than two decades: how to explain the social costs of inflation?
KEYWORDS:
Inflation; price determination; search
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