Advanced Search
MyIDEAS: Login

Inflation and Welfare with Search and Price Dispersion

Contents:

Author Info

  • Liang Wang

    () (Department of Economics, University of Hawaii)

Abstract

This paper studies the effect of inflation on welfare in a monetary economy with price dispersion and consumer search. When facing greater price dispersion with higher inflation, consumers search harder for lower prices, and increased search raises welfare by intensifying market competition. Producers post inefficiently high prices, and this creates a welfare loss. Both mechanisms are affected by the consumer's monetary balance. I develop a general equilibrium model with search frictions to incorporate the interrelationship of money, search, and endogenous price dispersion. Inflation aspects welfare through three channels: the real balance channel, the search channel, and the price posting channel. I calibrate the model to U.S. data and find that the welfare cost of 10% annual inflation is worth 3.23% of consumption; however, if either the real balance or the price posting channel is closed, the welfare cost significantly decreases to less than 0.15% of consumption. The price posting channel amplifies the welfare-diminishing effect of the real balance channel, and the aggregated negative effect exceeds the positive effect due to the search channel. The search cost only generates a negligible welfare loss.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_11-13.pdf
File Function: First version, 2011
Download Restriction: no

Bibliographic Info

Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 201113.

as in new window
Length: 49 pages
Date of creation: 18 Jul 2011
Date of revision:
Handle: RePEc:hai:wpaper:201113

Contact details of provider:
Postal: 2424 Maile Way, Honolulu, HI 96822
Phone: (808)956-8730
Fax: (808)956-4347
Email:
Web page: http://www.economics.hawaii.edu/
More information through EDIRC

Order Information:
Email:
Web: http://www.economics.hawaii.edu/research/working.html

Related research

Keywords: Inflation; Interest Rates; Money; Price Dispersion; Search; Welfare;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
  2. Randall Wright & Guillame Rocheteau, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Levine's Bibliography 666156000000000302, UCLA Department of Economics.
  3. Allen Head & Alok Kumar & Beverly Lapham, 2010. "Market Power, Price Adjustment, And Inflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 73-98, 02.
  4. Ariel Burstein & Christian Hellwig, 2008. "Welfare Costs of Inflation in a Menu Cost Model," 2008 Meeting Papers 1, Society for Economic Dynamics.
  5. M. Angeles Caraballo & Carlos Dabus & Carlos Usabiaga, 2006. "Relative prices and inflation: new evidence from different inflationary contexts," Applied Economics, Taylor and Francis Journals, vol. 38(16), pages 1931-1944.
  6. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2007. "Money and capital," Working Paper 0714, Federal Reserve Bank of Cleveland.
  7. Allen Head & Alok Kumar, 2005. "Price Dispersion, Inflation, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 533-572, 05.
  8. Caglayan, Mustafa & Filiztekin, Alpay & Rauh, Michael T., 2008. "Inflation, price dispersion, and market structure," European Economic Review, Elsevier, vol. 52(7), pages 1187-1208, October.
  9. Guy Debelle & Owen Lamont, 1996. "Relative Price Variability and Inflation: Evidence from US Cities," NBER Working Papers 5627, National Bureau of Economic Research, Inc.
  10. Faig, Miquel & Jerez, Belen, 2005. "A theory of commerce," Journal of Economic Theory, Elsevier, vol. 122(1), pages 60-99, May.
  11. Allen Head & Lucy Qian Liu & Guido Menzio & Randall Wright, 2010. "Equilibrium Price Dispersion and Rigidity: A New Monetarist Approach," PIER Working Paper Archive 10-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  12. Richard Dutu & Benoit Julien & Ian King, 2012. "On the Welfare Gains of Price Dispersion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 757-786, 08.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hai:wpaper:201113

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Web Technician).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.