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Inflation, Prices, And Information In Competitive Search

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  • Miquel Faig

    ()

  • Belen Jerez

    ()

Abstract

Inflation, as a tax on money, induces buyers to reduce their money balances. Sellers are aware of this, so to attract costumers, they post price offers that reduce the need for buyers to carry precautionary money balances. We study this effect of inflation in a competitive search environment where buyers experience preference shocks after they are matched with a seller. With full information, equilibrium price offers consist of a flat fee which is independent of the quantities purchased. With private information of buyers' preferences, equilibrium price offers are restricted by incentive compatibility constraints. As a result, the price schedule that maps quantities purchased onto payments must be increasing. As inflation rises, these price schedules become relatively flat, so the marginal cost of purchasing goods is low. Consequently, buyers that are not liquidity constrained (with a low desire to consume) purchase inefficiently large quantities. Meanwhile, buyers with a high desire to consume typically purchase inefficiently low quantities because, as their money balances fall, they become liquidity constrained. This is in contrast with the full information benchmark where inflation reduces the quantities purchased by all buyers.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we051708.

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Date of creation: Apr 2005
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Handle: RePEc:cte:werepe:we051708

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  1. Miquel Faig & Belén Jerez, 2005. "Precautionary Balances And The Velocity Of Circulation Of Money," Economics Working Papers, Universidad Carlos III, Departamento de Economía we051406, Universidad Carlos III, Departamento de Economía.
  2. Williamson, S. & Wright, R., 1991. "Barter and Monetary Exchange Under Private Information," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers, University of Western Ontario, The Centre for the Study of International Economic Relations 9107, University of Western Ontario, The Centre for the Study of International Economic Relations.
  3. Aleksander Berentsen & Guillaume Rocheteau, . "Money and Information," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 099, Institute for Empirical Research in Economics - University of Zurich.
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  14. Guillaume Rocheteau & Randall Wright, 2003. "Inflation and Welfare in Models with Trading Frictions," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 03-032, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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  17. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 385-411, April.
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