Price setting, price dispersion, and the value of money - or - The law of two prices
AbstractWe study models that combine search, monetary exchange, price posting by sellers, and buyers with preferences that differ across random meetings - say, because sellers in different meetings produce different varieties of the same good. We show how these features interact to influence the price level (i.e., the value of money) and price dispersion. First, price-posting equilibria exist with valued fiat currency, which is not true in the standard model. Second, although both are possible, price dispersion is more common than a single price. Third, perhaps surprisingly, we prove generically there cannot be more than two prices in equilibrium.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0209.
Date of creation: 2002
Date of revision:
Other versions of this item:
- Curtis, Elisabeth & Wright, Randall, 2004. "Price setting, price dispersion, and the value of money: or, the law of two prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1599-1621, November.
- NEP-ALL-2002-11-04 (All new papers)
- NEP-DGE-2002-11-04 (Dynamic General Equilibrium)
- NEP-IFN-2002-11-04 (International Finance)
- NEP-MON-2002-10-27 (Monetary Economics)
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98-03, University of Iowa, Department of Economics.
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