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Inflation and Welfare in Models with Trading Frictions

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  • Guillaume Rocheteau

    ()
    (Department of Research,Federal Reserve Bank of Cleveland)

  • Randall Wright

    ()
    (Department of Economics, University of Pennsylvania)

Abstract

We study the effects of inflation in models with various trading frictions. The framework is related to recent search-based monetary theory, in that trade takes place periodically in centralized and decentralized markets, but we consider three alternative mechanisms for price formation: bargaining, price taking, and posting. Both the value of money per transaction and market composition are endogenous, allowing us to characterize intensive and extensive margin effects. In the calibrated model, under posting the cost of inflation is similar to previous estimates, around 1% of consumption. Under bargaining, it is considerably bigger, between 3% and 5%. Under price taking, the cost of inflation depends on parameters, but tends to be between the bargaining and posting models. In some cases, moderate inflation may increase output or welfare.

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 03-032.

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Length: 36 pages
Date of creation: 12 Nov 2003
Date of revision:
Handle: RePEc:pen:papers:03-032

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Keywords: Money; Search; Frictions; Inflation;

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References

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  1. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September.
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  8. Thomas F. Cooley & Gary D. Hansen, 1991. "The welfare costs of moderate inflations," Proceedings, Federal Reserve Bank of Cleveland, pages 483-518.
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  24. Dale T. Mortensen & Randall Wright, 2002. "Competitive Pricing and Efficiency in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 1-20, February.
  25. Berentsen Aleksander & Rocheteau Guillaume, 2003. "On the Friedman Rule in Search Models with Divisible Money," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-21, December.
  26. Guillaume ROCHETEAU, 2000. "La quantité optimale de monnaie dans un modèle avec appariements aléatoires," Annales d'Economie et de Statistique, ENSAE, issue 58, pages 101-142.
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Citations

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Cited by:
  1. Huberto M. Ennis, 2004. "Search, money, and inflation under private information," Discussion Paper / Institute for Empirical Macroeconomics 142, Federal Reserve Bank of Minneapolis.
  2. Miquel Faig & Belen Jerez, 2005. "Inflation, Prices, And Information In Competitive Search," Economics Working Papers we051708, Universidad Carlos III, Departamento de Economía.
  3. Ben Craig & Guillaume Rocheteau, 2006. "Inflation and welfare: a search approach," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Jan.
  4. Miquel Faig, 2004. "Divisible Money in an Economy with Villages," Levine's Bibliography 122247000000000159, UCLA Department of Economics.
  5. Rocheteau, Guillaume, 2012. "The cost of inflation: A mechanism design approach," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1261-1279.
  6. Boragan Aruoba, S. & Rocheteau, Guillaume & Waller, Christopher, 2007. "Bargaining and the value of money," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2636-2655, November.

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