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Inflation and Welfare in Models with Trading Frictions

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Author Info
Guillaume Rocheteau () (Department of Research,Federal Reserve Bank of Cleveland)
Randall Wright () (Department of Economics, University of Pennsylvania)

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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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Publisher 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
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Handle: RePEc:pen:papers:03-032

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Related research
Keywords: Money Search Frictions Inflation

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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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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.:
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Cited by:
(explanations, 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.)

  1. Miquel Faig, 2006. "Divisible Money In An Economy With Villages," Working Papers tecipa-216, University of Toronto, Department of Economics. [Downloadable!]
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  2. Miquel Faig & Belen Jerez, 2005. "Inflation, Prices, And Information In Competitive Search," Economics Working Papers we051708, Universidad Carlos III, Departamento de Economía. [Downloadable!]
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  3. Huberto M. Ennis, 2004. "Search, money, and inflation under private information," Discussion Paper / Institute for Empirical Macroeconomics 142, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  4. Ben Craig & Guillaume Rocheteau, 2006. "Inflation and welfare: a search approach," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Jan. [Downloadable!]
  5. Guillaume Rocheteau & Christopher Waller, 2005. "Bargaining and the value of money," Working Paper 0501, Federal Reserve Bank of Cleveland. [Downloadable!]
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