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State-dependent pricing, inflation, and welfare in search economies

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  • Craig, Ben
  • Rocheteau, Guillaume

Abstract

We investigate the welfare effects of inflation in economies with search frictions and menu costs. We first analyze an economy where there is no transaction demand for money balances: Money is a mere unit of account. We determine a condition under which strictly positive inflation is desirable. We relate this condition to a standard efficiency condition for search economies. Second, we consider a related economy in which there is a transaction role for money. In the absence of menu costs, the Friedman rule is optimal. In the presence of menu costs, the optimal inflation rate is negative for our numerical examples provided menu costs are small. A deviation from the Friedman rule can be optimal depending on the extent of the search externalities.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 52 (2008)
Issue (Month): 3 (April)
Pages: 441-468

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Handle: RePEc:eee:eecrev:v:52:y:2008:i:3:p:441-468

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  1. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November.
  2. Benabou, Roland, 1992. "Inflation and Efficiency in Search Markets," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 299-329, April.
  3. Levy, Daniel, et al, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 791-825, August.
  4. Huberto M. Ennis, 2004. "Search, money, and inflation under private information," Discussion Paper / Institute for Empirical Macroeconomics 142, Federal Reserve Bank of Minneapolis.
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  15. Allen Head & Alok Kumar & Beverly Lapham, 2010. "Market Power, Price Adjustment, And Inflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 73-98, 02.
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  17. Allen Head & Alok Kumar, 2005. "Price Dispersion, Inflation, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 533-572, 05.
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  23. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  24. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  25. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  26. Stephen D. Williamson, 2006. "Search, Limited Participation, And Monetary Policy ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 107-128, 02.
  27. Rotemberg, Julio J, 1983. "Aggregate Consequences of Fixed Costs of Price Adjustment [Sticky Prices and Disequilibrium Adjustment in a Rational Model of the Inflationary Process]," American Economic Review, American Economic Association, vol. 73(3), pages 433-36, June.
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Cited by:
  1. Stephen Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, issue May, pages 265-302.
  2. Wright, Randall & Trejos, Alberto, 2014. "Search-Based Models of Money and Finance: An Integrated Approach," Working Papers 709, Federal Reserve Bank of Minneapolis.
  3. Allen Head & Alok Kumar & Beverly Lapham, 2010. "Market Power, Price Adjustment, And Inflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 73-98, 02.
  4. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96 Elsevier.
  5. Ben Craig & Guillaume Rocheteau, 2008. "Inflation and Welfare: A Search Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 89-119, 02.

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