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Price Dispersion, Inflation, And Welfare

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Author Info
Allen Head
Alok Kumar

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Abstract

We examine the implications of inflation for both price dispersion and welfare in a monetary search economy. In our economy, if the degree of buyers' incomplete information about prices is fixed, both price dispersion and real prices are increasing in inflation. As the inflation rate approaches the Friedman rule, both price dispersion and welfare losses vanish. If households choose the number of prices to observe, then the optimal inflation rate may exceed the Friedman rule as inflation induces search and, up to a point, raises welfare by eroding market power. Copyright 2005 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 46 (2005)
Issue (Month): 2 (05)
Pages: 533-572
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Handle: RePEc:ier:iecrev:v:46:y:2005:i:2:p:533-572

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  1. Canadian Macro Study Group
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  1. Alok Kumar, 2004. "Inflation and the Dispersion of Real Wages," Econometric Society 2004 Far Eastern Meetings 750, Econometric Society. [Downloadable!]
    Other versions:
  2. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics. [Downloadable!]
  3. Ben R. Craig & Guillaume Rocheteau, 2005. "State-dependent pricing, inflation, and welfare in search economies," Working Paper 0504, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  4. Brian Peterson & Shouyong Shi, 2006. "Money, Price Dispersion and Welfare," Working Papers tecipa-191, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  5. Allen Head & Alok Kumar & Beverly Lapham, 2006. "Market Power, Price Adjustment, and Inflation," Working Papers 1089, Queen's University, Department of Economics. [Downloadable!]
  6. Narayana R. Kocherlakota, 2005. "Optimal monetary policy: what we know and what we don’t know," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Oct, pages 10-19. [Downloadable!]
    Other versions:
  7. Huberto M. Ennis, 2007. "Avoiding the inflation tax," Working Paper 07-06, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  8. Sherrill Shaffer, 2008. "Earnings Valuation And Sources Of Growth," CAMA Working Papers 2008-32, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  9. Manolis Galenianos & Philipp Kircher, 2005. "A Model of Money with Multilateral Matching, Second Version," PIER Working Paper Archive 07-004, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Nov 2006. [Downloadable!]
  10. Randall Wright, 2005. "Introduction to "Models of Monetary Economies II: The Next Generation"," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Oct, pages 2-9.
    Other versions:
  11. Ritter, Moritz, 2007. "The Optimum Quantity of Money Revisited: Distortionary Taxation in a Search Model of Money," MPRA Paper 1973, University Library of Munich, Germany. [Downloadable!]
  12. Alok Kumar, 2008. "Capital Tax, Minimum Wage, and Labor Market Outcomes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 133-154, January. [Downloadable!] (restricted)
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