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Money, Price Dispersion and Welfare

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  • Brian Peterson
  • Shouyong Shi

Abstract

We introduce heterogeneous preferences into a tractable model of monetary search to generate price dispersion, and then examine the effects of money growth on price dispersion and welfare. With buyers' search intensity fixed, we find that money growth increases the range of (real) prices and lowers welfare as agents shift more of their consumption to less desirable goods. When buyers' search intensity is endogenous, multiple equilibria are possible. In the equilibrium with the highest welfare level, money growth reduces welfare and increases the range of prices, while having ambiguous effects on search intensity. However, there can be a welfare-inferior equilibrium in which an increase in money growth increases search intensity, increases welfare, and reduces the range of prices.

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File URL: http://www.economics.utoronto.ca/public/workingPapers/tecipa-191-1.pdf
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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-191.

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Length: 25 pages
Date of creation: 13 Feb 2006
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-191

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Keywords: Price dispersion; Search; Efficiency;

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References

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  1. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  2. Benabou, Roland, 1988. "Search, Price Setting and Inflation," Review of Economic Studies, Wiley Blackwell, vol. 55(3), pages 353-76, July.
  3. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  4. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, 2004. "Friedman meets Hosios: efficiency in search models of money," Working Paper 0408, Federal Reserve Bank of Cleveland.
  5. Debelle, Guy & Lamont, Owen, 1997. "Relative Price Variability and Inflation: Evidence from U.S. Cities," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 132-52, February.
  6. Aleksander Berentsen & Guillaume Rocheteau, . "On the Efficiency of Monetary Exchange:How Divisibility of Money Matters," IEW - Working Papers 101, Institute for Empirical Research in Economics - University of Zurich.
  7. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
  8. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
  9. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers 930, Queen's University, Department of Economics.
  10. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April.
  11. Guillaume Rocheteau & Ricardo Lagos, 2004. "Superneutrality and the welfare effects of inflation," 2004 Meeting Papers 93, Society for Economic Dynamics.
  12. Camera, G. & Corbae, D., 1998. "Money and Price Dispersion," Working Papers 98-03, University of Iowa, Department of Economics.
  13. 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.
  14. Weimin Wang & Shouyong Shi, 2006. "The Variability of Velocity of Money in a Search Model," Working Papers tecipa-190, University of Toronto, Department of Economics.
  15. Aleksander Berentsen & Guillaume Rocheteau, . "Money and the Gains from Trade," IEW - Working Papers 100, Institute for Empirical Research in Economics - University of Zurich.
  16. Reinsdorf, Marshall, 1994. "New Evidence on the Relation between Inflation and Price Dispersion," American Economic Review, American Economic Association, vol. 84(3), pages 720-31, June.
  17. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  18. Benabou, Roland, 1992. "Inflation and Efficiency in Search Markets," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 299-329, April.
  19. 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.
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Citations

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Cited by:
  1. Allen Head & Alok Kumar & Beverly Lapham, 2006. "Market Power, Price Adjustment, and Inflation," Working Papers 1089, Queen's University, Department of Economics.
  2. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics.
  3. Huberto M. Ennis, 2005. "Avoiding the inflation tax," Working Paper 05-10, Federal Reserve Bank of Richmond.
  4. Sascha S. Becker & Dieter Nautz, 2010. "Inflation, Price Dispersion and Market Integration through the Lens of a Monetary Search Model," SFB 649 Discussion Papers SFB649DP2010-058, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Mustafa Caglayan & Alpay Filiztekin & Michael T. Rauh, 2006. "Inflation, Price Dispersion, and Market Structure," Working Papers 2006-03, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  6. Ahiabu, Stephen, 2006. "Inflation and the underground economy," MPRA Paper 763, University Library of Munich, Germany, revised Oct 2006.
  7. Richard Ashley, 2010. "On the Granger Causality between Median Inflation and Price Dispersion," Working Papers e07-24, Virginia Polytechnic Institute and State University, Department of Economics.

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