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Search, Sticky Prices, and Inflation

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  • Peter A. Diamond

Abstract

This paper examines equilibrium in a market with free entry where consumers search and firms set prices on individual units of the commodity. The prices attached to newly produced goods are continuously adjusted. Prices attached to previously produced goods can only be changed at a cost. Thus inflation reduces the real price of goods in inventory awaiting sale. The presence of previously priced goods lowers the reservation price of customers. Thus, inflation cuts into the market power created by the need to search for the good. Consumer welfare is inverse u-shaped in inflation with a strictly positive optimal inflation rate.

Suggested Citation

  • Peter A. Diamond, 1993. "Search, Sticky Prices, and Inflation," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 53-68.
  • Handle: RePEc:oup:restud:v:60:y:1993:i:1:p:53-68.
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    6. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, January.
    7. Michael Bruno & Jeffrey D. Sachs, 1985. "Economics of Worldwide Stagflation," NBER Books, National Bureau of Economic Research, Inc, number brun85-1, January.
    8. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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