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Matching friction, coordination, and monetary nonneutrality

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  • Li, King King
  • Zhu, Tao

Abstract

This paper theoretically and experimentally investigates matching friction as a cause of monetary nonneutrality. We design a price-posting game in which mismatching (i.e., a player not being matched with a trading partner) is costly and can only be eliminated if players coordinate on one equilibrium from a specific subset of multiple equilibria. In the lab, subjects coordinate by certain pricing and visiting rules, and their actions appear to be consistent with such an equilibrium. A nominal shock disturbs the established coordination patterns and, in particular, causes sellers to adjust their pricing rules. The adjustment is persistent and differs at a disaggregate level in a way that the resulting nonneutrality gets along with the quantity theory (i.e., the aggregate price level is proportional to the aggregate nominal stock).

Suggested Citation

  • Li, King King & Zhu, Tao, 2025. "Matching friction, coordination, and monetary nonneutrality," Journal of Economic Dynamics and Control, Elsevier, vol. 181(C).
    • Handle: RePEc:eee:dyncon:v:181:y:2025:i:c:s0165188925001721
    DOI: 10.1016/j.jedc.2025.105206
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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