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?

JEL Classification: D49; E31.