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Inflation, prices, and information in competitive search

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  • Faig, Miquel
  • Jerez, Belén

Abstract

Inflation, as a tax on money, induces buyers to reduce their money balances. Sellers are aware of this, so to attract costumers, they post price offers that reduce the need for buyers to carry precautionary money balances. We study this effect of inflation in a competitive search environment where buyers experience preference shocks after they are matched with a seller. With full information, equilibrium price offers consist of a flat fee which is independent of the quantities purchased. With private information of buyers' preferences, equilibrium price offers are restricted by incentive compatibility constraints. As a result, the price schedule that maps quantities purchased onto payments must be increasing. As inflation rises, these price schedules become relatively flat, so the marginal cost of purchasing goods is low. Consequently, buyers that are not liquidity constrained (with a low desire to consume) purchase inefficiently large quantities. Meanwhile, buyers with a high desire to consume typically purchase inefficiently low quantities because, as their money balances fall, they become liquidity constrained. This is in contrast with the full information benchmark where inflation reduces the quantities purchased by all buyers.

Suggested Citation

  • Faig, Miquel & Jerez, Belén, 2005. "Inflation, prices, and information in competitive search," UC3M Working papers. Economics we051708, Universidad Carlos III de Madrid. Departamento de Economía.
  • Handle: RePEc:cte:werepe:we051708
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    References listed on IDEAS

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    1. Miquel Faig, 2004. "Divisible Money in an Economy with Villages," Levine's Bibliography 122247000000000159, UCLA Department of Economics.
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    Cited by:

    1. Manolis Galenianos & Philipp Kircher, 2012. "On The Game‐Theoretic Foundations Of Competitive Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(1), pages 1-21, February.
    2. Dong, Mei & Jiang, Janet Hua, 2014. "Money and price posting under private information," Journal of Economic Theory, Elsevier, vol. 150(C), pages 740-777.
    3. Adrian Masters, 2010. "Money in a Model of Prior Production and Imperfectly Directed Search," Discussion Papers 10-11, University at Albany, SUNY, Department of Economics.
    4. Rocheteau, Guillaume, 2012. "The cost of inflation: A mechanism design approach," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1261-1279.
    5. Benjamin Lester & Guillaume Rocheteau & Pierre‐Olivier Weill, 2015. "Competing for Order Flow in OTC Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 77-126, June.
    6. Ennis, Huberto M., 2008. "Search, money, and inflation under private information," Journal of Economic Theory, Elsevier, vol. 138(1), pages 101-131, January.
    7. Daisy J. HUANG & Charles Ka Yui LEUNG & Chung-Yi TSE, 2017. "What account for the differences in rent-price ratio and turnover rate? A search-and-matching approach," ISER Discussion Paper 0990, Institute of Social and Economic Research, Osaka University.
    8. Stephen D. Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, issue May, pages 265-302.
    9. Faig, Miquel & Huangfu, Xiuhua, 2007. "Competitive-search equilibrium in monetary economies," Journal of Economic Theory, Elsevier, vol. 136(1), pages 709-718, September.
    10. Lars Boerner & Albrecht Ritschl, 2010. "Communal Responsibility and the Coexistence of Money and Credit Under Anonymous Matching," CEP Discussion Papers dp1034, Centre for Economic Performance, LSE.
    11. 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.
    12. Shao, Enchuan, 2014. "The threat of counterfeiting in competitive search equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 168-185.
    13. Lars Boerner & Albrecht Ritschl, 2006. "Making Financial Markets: Contract Enforcement and the Emergence of Tradable Assets in Late Medieval Europe," 2006 Meeting Papers 884, Society for Economic Dynamics.
    14. Fusaro, Marc Anthony, 2010. "Are "bounced check loans" really loans? Theory, evidence and policy," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 492-500, November.
    15. Galenianos, Manolis & Kircher, Philipp, 2008. "A model of money with multilateral matching," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1054-1066, September.

    More about this item

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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