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Search, Market Power, and Inflation Dynamics

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  • Allen Head

    ()
    (Department of Economics Queen's University)

  • Beverly Lapham

Abstract

The short-run non-neutrality of money and its implications for inflation dynamics are examined in a monetary search economy with heterogeneous agents. Lump-sum money injections affect the distribution of money holdings in equilibrium and thus generate short-run non-neutrality. The response of prices and inflation to shocks of this type depends on the changes in households' search intensity that they induce. Monetary shocks change the distribution of prices in equilibrium and thus alter the returns to search. The resulting changes in optimal search intensity affect sellers' profit maximizing markups and thus may result in sluggish price adjustment and persistent inflation despite the absence of restrictions of sellers; ability to set prices in every period

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File URL: http://repec.org/sed2006/up.27498.1140009845.pdf
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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 559.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:559

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Keywords: Price Dispersion; Inflation; Mark-ups; Dynamics;

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References

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  1. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
  2. Allen Head & Shouyong Shi, 2000. "A Fundamental Theory of Exchange Rates and Direct Currency Trades," Working Papers 993, Queen's University, Department of Economics.
  3. Jonathan Chiu, 2007. "Endogenously Segmented Asset Market in an Inventory Theoretic Model of Money Demand," Working Papers 07-46, Bank of Canada.
  4. Allen Head & Alok Kumar, 2004. "Price Dispersion, Inflation and Welfare," NajEcon Working Paper Reviews 122247000000000241, www.najecon.org.
  5. Miguel Molico & Yahong Zhang, 2006. "Monetary Policy and the Distribution of Money and Capital," Computing in Economics and Finance 2006 136, Society for Computational Economics.
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