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Inflation, Prices, and Information in Competitive Search

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  • Faig Miquel

    ()
    (University of Toronto)

  • Jerez Belén

    ()
    (Universidad Carlos III de Madrid)

Abstract

We study the effects of inflation in a competitive search model where each buyer's utility is private information, and money is essential. The equilibrium is efficient at the Friedman rule, but inflation creates an inefficiency in the terms of trade. Buyers experience a preference shock after they are matched with a seller, and thus they have a precautionary motive for holding money. Sellers, who compete to attract buyers, post non-linear price schedules. As inflation rises, sellers post relatively flat price schedules, which reduce the need for precautionary balances. These price schedules induce buyers with a low desire to consume to purchase inefficiently high quantities because of the low marginal cost of purchasing goods. In contrast, buyers with a high desire to consume purchase inefficiently low quantities as they face binding liquidity constraints. The model fits historical US data on velocity and interest rates.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 6 (2006)
Issue (Month): 1 (September)
Pages: 1-34

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Handle: RePEc:bpj:bejmac:v:advances.6:y:2006:i:1:n:3

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  1. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 915-944, October.
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  7. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers 930, Queen's University, Department of Economics.
  8. Guillaume Rocheteau & Randall Wright, 2004. "Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium," Working Paper 0405, Federal Reserve Bank of Cleveland.
  9. Miquel Faig & Belén Jerez, 2006. "Precautionary Balances and the Velocity of Circulation of Money," Working Papers tecipa-188, University of Toronto, Department of Economics.
  10. Camera, Gabriele & Winkler, Johannes, 2003. "International monetary trade and the law of one price," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1531-1553, October.
  11. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
  12. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  13. Faig, Miquel, 1989. "Seasonal Fluctuations and the Demand for Money," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 847-61, November.
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Citations

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Cited by:
  1. Lars Boerner & Albrecht Ritschl, 2010. "Communal Responsibility and the Coexistence of Money and Credit Under Anonymous Matching," CEP Discussion Papers dp1034, Centre for Economic Performance, LSE.
  2. Stephen Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, issue May, pages 265-302.
  3. Lars Boerner & Albrecht Ritschl, 2006. "Making Financial Markets: Contract Enforcement and the Emergence of Tradable Assets in Late Medieval Europe," 2006 Meeting Papers 884, Society for Economic Dynamics.
  4. Stephen D. Williamson & Randall Wright, 2010. "New Monetarist Economics: models," Staff Report 443, Federal Reserve Bank of Minneapolis.
  5. Galenianos, Manolis & Kircher, Philipp, 2008. "A model of money with multilateral matching," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1054-1066, September.
  6. Ennis, Huberto M., 2008. "Search, money, and inflation under private information," Journal of Economic Theory, Elsevier, vol. 138(1), pages 101-131, January.
  7. Rocheteau, Guillaume, 2012. "The cost of inflation: A mechanism design approach," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1261-1279.
  8. Dong, Mei & Jiang, Janet Hua, 2014. "Money and price posting under private information," Journal of Economic Theory, Elsevier, vol. 150(C), pages 740-777.
  9. Lester, Benjamin & Rocheteau, Guillaume & Weill, Pierre-Olivier, 2014. "Competing for order flow in OTC markets," Working Papers 14-9, Federal Reserve Bank of Philadelphia.
  10. Fusaro, Marc Anthony, 2010. "Are "bounced check loans" really loans? Theory, evidence and policy," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 492-500, November.
  11. Enchuan Shao, 2013. "The Threat of Counterfeiting in Competitive Search Equilibrium," Working Papers 13-22, Bank of Canada.
  12. Adrian Masters, 2010. "Money in a Model of Prior Production and Imperfectly Directed Search," Discussion Papers 10-11, University at Albany, SUNY, Department of Economics.

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