The basic reason for thinking that this model may help to account for significant costs of
inflation is that it provides a propagation mechanism through which inflation might impede
the market processes that coordinate economic activity. The mechanism involves the entry
and exit of business firms that collectively constitute the network of trade specialists. Because
price changes are not perfectly coordinated, a higher trend rate of inflation should imply,
on average, more dispersion in the relative prices offered by the different specialists. Such
extraneous relative-price variability introduces more volatility into the demand faced by any
individual specialist, thus raising the incidence of shop failures throughout the economy. As
a result, abstracting from any effects of wage rigidity and the problem of the zero lower
bound on nominal interest rates, increased trend inflation should reduce average GDP by
impeding the transactions process.