IDEAS home Printed from https://ideas.repec.org/p/cnn/wpaper/23-013e.html
   My bibliography  Save this paper

Inflation and entry costs in a monetary search model

Author

Listed:
  • Ryoji Hiraguchi
  • Keiichiro Kobayashi

Abstract

In this study, we construct a variant of the Lagos-Wright monetary model in which both buyers and sellers optimally decide whether to enter decentralized mar- ket by paying fixed entry costs. In the decentralized market, the sellers produce the intermediate inputs which are necessary to produce the general good traded in the centralized market. We show that the Friedman rule of setting nominal interest rate to zero may not be optimal. The optimal inflation rate is derived explicitly for specific functional forms. It is shown that the optimal inflation rate is lower for lower buyer entry costs, because the lower entry costs generate the congestion of buyers which must be compensated for by lower cost of money holdings. It is also shown that the optimal inflation is lower for higher seller entry costs. These results may explain why the secular decline in inflation has been observed in recent decades when the emergence and growth of Internet usage has lowered shopping costs for buyers. Keywords : Optimal monetary policy; entry cost; competitive pricing; low inflation. JEL classification code: E13; E42; E52

Suggested Citation

  • Ryoji Hiraguchi & Keiichiro Kobayashi, 2023. "Inflation and entry costs in a monetary search model," CIGS Working Paper Series 23-013E, The Canon Institute for Global Studies.
    • Handle: RePEc:cnn:wpaper:23-013e
    as

    Download full text from publisher

    File URL: https://cigs.canon/en/uploads/2023/08/Inflation_and_entry_costs_in_a_monetary_search_model_Hiraguchi_23-013E.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Aleksander Berentsen & Gabriele Camera & C hristopher W aller, 2005. "The Distribution Of Money Balances And The Nonneutrality Of Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 465-487, May.
    2. Berentsen, Aleksander & Waller, Christopher, 2015. "Optimal Stabilization Policy With Search Externalities," Macroeconomic Dynamics, Cambridge University Press, vol. 19(3), pages 669-700, April.
    3. Etienne Wasmer & Philippe Weil, 2004. "The Macroeconomics of Labor and Credit Market Imperfections," American Economic Review, American Economic Association, vol. 94(4), pages 944-963, September.
    4. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, January.
    5. repec:hal:spmain:info:hdl:2441/8622 is not listed on IDEAS
    6. Etienne Wasmer & Philippe Weil, 2004. "The Macroeconomics of Credit and Labor Markets Imperfections," SciencePo Working papers hal-01020132, HAL.
    7. Philippe Weil & Etienne Wasmer, 2004. "The macroeconomics of credit and labor market imperfections," ULB Institutional Repository 2013/13436, ULB -- Universite Libre de Bruxelles.
    8. repec:hal:wpspec:info:hdl:2441/8622 is not listed on IDEAS
    9. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Huberto M. Ennis, 2009. "Avoiding The Inflation Tax," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 607-625, May.
    2. Qian Chen & Christoffer Koch & Padma Sharma & Gary Richardson, 2020. "Payments Crises and Consequences," NBER Working Papers 27733, National Bureau of Economic Research, Inc.
    3. Branch, William A. & Petrosky-Nadeau, Nicolas & Rocheteau, Guillaume, 2016. "Financial frictions, the housing market, and unemployment," Journal of Economic Theory, Elsevier, vol. 164(C), pages 101-135.
    4. Rocheteau, Guillaume & Rodriguez-Lopez, Antonio, 2014. "Liquidity provision, interest rates, and unemployment," Journal of Monetary Economics, Elsevier, vol. 65(C), pages 80-101.
    5. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    6. repec:hal:spmain:info:hdl:2441/7c8vm7kbos9f08oo90oq51cqrp is not listed on IDEAS
    7. Guillaume Rocheteau & Randall Wright & Cathy Zhang, 2018. "Corporate Finance and Monetary Policy," American Economic Review, American Economic Association, vol. 108(4-5), pages 1147-1186, April.
    8. repec:hal:spmain:info:hdl:2441/5l6uh8ogmqildh09h481l2tb5 is not listed on IDEAS
    9. Balleer, Almut & Arabzadeh Jamali, Hamzeh & Gehrke, Britta, 2020. "Uncovering the mechanism(s): Financial constraints and wages," CEPR Discussion Papers 15585, C.E.P.R. Discussion Papers.
    10. Miroslav Gabrovski & Athanasios Geromichalos & Lucas Herrenbrueck & Ioannis Kospentaris & Sukjoon Lee, 2023. "The real effects of financial disruptions in a monetary economy," Working Papers 2301, VCU School of Business, Department of Economics.
    11. Guillaume Vuillemey & Etienne Wasmer, 2016. "Frictional Unemployment and Stochastic Bubbles," Working Papers hal-03393187, HAL.
    12. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
    13. repec:hal:spmain:info:hdl:2441/5por5bt92h8l0bc7ls4elmcc0b is not listed on IDEAS
    14. Brzustowski, Thomas & Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2018. "Disentangling goods, labor, and credit market frictions in three European economies," Labour Economics, Elsevier, vol. 50(C), pages 180-196.
    15. Lehmann, Etienne & Van Der Linden, Bruno, 2010. "Search Frictions On Product And Labor Markets: Money In The Matching Function," Macroeconomic Dynamics, Cambridge University Press, vol. 14(1), pages 56-92, February.
    16. Marchesiani, Alessandro & Senesi, Pietro, 2009. "Money And Nominal Bonds," Macroeconomic Dynamics, Cambridge University Press, vol. 13(2), pages 189-199, April.
    17. Gabriela BADAREU & Roxana BÄ‚DÃŽRCEA & Alina Georgiana MANTA & Nicoleta DORAN, 2022. "FHow Important Is the Relationship between Financial Development and Economic Growth? Bibliometric Analysis," Finante - provocarile viitorului (Finance - Challenges of the Future), University of Craiova, Faculty of Economics and Business Administration, vol. 1(24), pages 62-71, November.
    18. Tsasa, Jean-Paul K., 2022. "Labor market volatility in a fully specified RBC search model: An analytical investigation," Journal of Mathematical Economics, Elsevier, vol. 103(C).
    19. Brand, Thomas & Isoré, Marlène & Tripier, Fabien, 2017. "Uncertainty Shocks and Firm Dynamics: Search and Monitoring in the Credit Market," CEPREMAP Working Papers (Docweb) 1707, CEPREMAP.
    20. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96, Elsevier.
    21. repec:hal:wpspec:info:hdl:2441/1787nsa6d1927a90u4bkkombn4 is not listed on IDEAS
    22. Zachary Bethune & Guillaume Rocheteau & Peter Rupert, 2015. "Aggregate Unemployment and Household Unsecured Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 77-100, January.
    23. Dong, Mei & Huangfu, Stella & Sun, Hongfei & Zhou, Chenggang, 2021. "A macroeconomic theory of banking oligopoly," European Economic Review, Elsevier, vol. 138(C).
    24. Qin Li & Ben Lourie & Alexander Nekrasov & Terry Shevlin, 2022. "Employee Turnover and Firm Performance: Large-Sample Archival Evidence," Management Science, INFORMS, vol. 68(8), pages 5667-5683, August.

    More about this item

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cnn:wpaper:23-013e. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: The Canon Institute for Global Studies (email available below). General contact details of provider: https://edirc.repec.org/data/canonjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.