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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. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, 2004. "Friedman meets Hosios: efficiency in search models of money," Working Paper 0408, Federal Reserve Bank of Cleveland.
  2. Berentsen, Aleksander & Rocheteau, Guillaume, 2002. "On the efficiency of monetary exchange: how divisibility of money matters," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(8), pages 1621-1649, November.
  3. Guy Debelle & Owen Lamont, 1996. "Relative Price Variability and Inflation: Evidence from US Cities," NBER Working Papers 5627, National Bureau of Economic Research, Inc.
  4. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(3), pages 463-484, June.
  5. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, Econometric Society, vol. 65(1), pages 75-102, January.
  6. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
  7. L. Wade, 1988. "Review," Public Choice, Springer, Springer, vol. 58(1), pages 99-100, July.
  8. Wang, Weimin & Shi, Shouyong, 2006. "The variability of velocity of money in a search model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(3), pages 537-571, April.
  9. Aleksander Berentsen & Guillaume Rocheteau, 2003. "Money and the Gains from Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 263-297, February.
  10. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
  11. Guillaume Rocheteau & Ricardo Lagos, 2004. "Superneutrality and the welfare effects of inflation," 2004 Meeting Papers, Society for Economic Dynamics 93, Society for Economic Dynamics.
  12. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, Elsevier, vol. 53(2), pages 215-235, April.
  13. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
  14. Camera, G. & Corbae, D., 1998. "Money and Price Dispersion," Working Papers, University of Iowa, Department of Economics 98-03, University of Iowa, Department of Economics.
  15. Reinsdorf, Marshall, 1994. "New Evidence on the Relation between Inflation and Price Dispersion," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 720-31, June.
  16. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 533-572, 05.
  17. Benabou, Roland, 1992. "Inflation and Efficiency in Search Markets," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(2), pages 299-329, April.
  18. Benabou, Roland, 1988. "Search, Price Setting and Inflation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 55(3), pages 353-76, July.
  19. 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, University of Chicago Press, vol. 100(2), pages 349-89, April.
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Citations

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Cited by:
  1. Richard Ashley & Haichun Ye, 2012. "On the Granger causality between median inflation and price dispersion," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 44(32), pages 4221-4238, November.
  2. Huberto M. Ennis, 2007. "Avoiding the Inflation Tax," 2007 Meeting Papers, Society for Economic Dynamics 493, Society for Economic Dynamics.
  3. Becker, Sascha S. & Nautz, Dieter, 2012. "Inflation, price dispersion and market integration through the lens of a monetary search model," European Economic Review, Elsevier, Elsevier, vol. 56(3), pages 624-634.
  4. Caglayan, Mustafa & Filiztekin, Alpay & Rauh, Michael T., 2008. "Inflation, price dispersion, and market structure," European Economic Review, Elsevier, Elsevier, vol. 52(7), pages 1187-1208, October.
  5. Allen Head & Alok Kumar & Beverly Lapham, 2006. "Market Power, Price Adjustment, and Inflation," Working Papers, Queen's University, Department of Economics 1089, Queen's University, Department of Economics.
  6. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers, University of Toronto, Department of Economics tecipa-211, University of Toronto, Department of Economics.
  7. Ahiabu, Stephen, 2006. "Inflation and the underground economy," MPRA Paper 763, University Library of Munich, Germany, revised Oct 2006.

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