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Search, money, and inflation under private information

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  • Huberto M. Ennis

Abstract

I study a version of the Lagos-Wright (2003) model of monetary exchange in which buyers have private information about their tastes and sellers make take-it-or-leave-it-offers (i.e., have the power to set prices and quantities). The introduction of imperfect information makes the existence of monetary equilibrium a more robust feature of the environment. In general, the model has a monetary steady state in which only a proportion of the agents hold money. Agents who do not hold money cannot participate in trade in the decentralized market. The proportion of agents holding money is endogenous and depends (negatively) on the level of expected inflation. As in Lagos and Wright's model, in equilibrium there is a positive welfare cost of expected inflation, but the origins of this cost are very different.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 142.

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Date of creation: 2004
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Handle: RePEc:fip:fedmem:142

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Keywords: Money - Mathematical models;

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  1. Faig Miquel & Jerez Belén, 2006. "Inflation, Prices, and Information in Competitive Search," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 6(1), pages 1-34, September.
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  3. Tsunao Okumura, 2005. "Wealth as a Signal in the Search Model of Money," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1401, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  6. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
  7. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  8. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, Elsevier, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
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  13. Faig, Miquel & Jerez, Belen, 2005. "A theory of commerce," Journal of Economic Theory, Elsevier, Elsevier, vol. 122(1), pages 60-99, May.
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  18. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, Springer, vol. 4(3), pages 345-80.
  19. Elisabeth Curtis & Randall Wright, 2002. "Price setting, price dispersion, and the value of money - or - The law of two prices," Working Paper 0209, Federal Reserve Bank of Cleveland.
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  22. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(1), pages 118-41, February.
  23. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
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