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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. 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.
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  8. Miquel Faig & Belén Jerez, 2005. "Precautionary Balances And The Velocity Of Circulation Of Money," Economics Working Papers we051406, Universidad Carlos III, Departamento de Economía.
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Citations

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Cited by:
  1. 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.
  2. 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.
  3. Enchuan Shao, 2013. "The Threat of Counterfeiting in Competitive Search Equilibrium," Working Papers 13-22, Bank of Canada.
  4. Huberto M. Ennis, 2005. "Search, Money, and Inflation under Private Information," 2005 Meeting Papers 135, Society for Economic Dynamics.
  5. Stephen D. Williamson & Randall Wright, 2010. "New Monetarist Economics: models," Staff Report 443, Federal Reserve Bank of Minneapolis.
  6. 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.
  7. Stephen Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, issue May, pages 265-302.
  8. Boerner, Lars & Ritschl, Albrecht, 2011. "Communal Responsibility and the Coexistence of Money and Credit Under Anonymous Matching," CEPR Discussion Papers 8184, C.E.P.R. Discussion Papers.
  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. Manolis Galenianos & Philipp Kircher, 2012. "On the game-theoretic foundations of competitive search equilibrium," LSE Research Online Documents on Economics 29707, London School of Economics and Political Science, LSE Library.
  11. Mei Dong & Janet Hua Jiang, 2011. "Money and Price Posting under Private Information," Working Papers 11-22, Bank of Canada.
  12. Galenianos, Manolis & Kircher, Philipp, 2008. "A model of money with multilateral matching," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1054-1066, September.
  13. Rocheteau, Guillaume, 2012. "The cost of inflation: A mechanism design approach," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1261-1279.

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