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Inflation, Price Dispersion and Market Integration through the Lens of a Monetary Search Model

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  • Sascha S. Becker
  • Dieter Nautz

Abstract

Monetary search theory implies that the real effects of inflation via its impact on price dispersion depend on the level of search costs and, thus, on the level of market integration. For less integrated markets, the inflation-price dispersion nexus is predicted to be asymmetrically V-shaped which results in an optimal inflation rate above zero. For highly integrated markets with low search costs, however, the impact of inflation on price dispersion should only be small. Using price data of the European Union member states, this paper is the first that tests and confirms these predictions of monetary search theory.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2010-058.

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Length: 30 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2010-058

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Keywords: Inflation; Relative price variability; Monetary search; Market integration;

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Citations

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Cited by:
  1. Christian Basteck & Tijmen R. Daniëls, 2010. "Every Symmetric 3 x 3 Global Game of Strategic Complementarities Is Noise Independent," SFB 649 Discussion Papers SFB649DP2010-061, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Sascha S. Becker, 2011. "What Drives the Relationship Between Inflation and Price Dispersion? Market Power vs. Price Rigidity," SFB 649 Discussion Papers SFB649DP2011-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Enno Mammen & Christoph Rothe & Melanie Schienle, 2010. "Nonparametric Regression with Nonparametrically Generated Covariates," SFB 649 Discussion Papers SFB649DP2010-059, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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