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Inflation, trade frictions, and productive activity in a multiple-matching model of money

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  • Derek Laing
  • Victor E. Li
  • Ping Wang

Abstract

This paper investigates the relationship between money growth, inflation, and productive activity in a general equilibrium model of search. The use of a multiple-matching technique, where trade frictions are captured by limited consumption variety, allows us to study price determination in a search-theoretic environment with divisible money and goods. In our basic framework, productive activity and matching in the goods market are endogenized by a time allocation decision of work and shopping effort. We find that in such an environment, a positive feedback between shopping and work effort decisions creates a channel by which inflation can positively influence productive activity. This feature also creates the possibility of multiple steady state equilibria when household preferences for variety is sufficiently great. We also consider an alternative means of endogenizing the matching technology through endogenous firm entry. Consistent with the findings of our basic framework, the importance of search frictions continues to be essential for the non-uniqueness of equilibria and an additional channel which links money growth to real activity.

Suggested Citation

  • Derek Laing & Victor E. Li & Ping Wang, 2000. "Inflation, trade frictions, and productive activity in a multiple-matching model of money," FRB Atlanta Working Paper 2000-28, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2000-28
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    References listed on IDEAS

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    Cited by:

    1. Ricardo Lagos & Guillaume Rocheteau, 2005. "Inflation, Output, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 495-522, May.
    2. Alok Kumar, 2013. "Inflation, Redistribution, and Real Activities," Department Discussion Papers 1302, Department of Economics, University of Victoria.
    3. Jun Zhang & Haibin Wu, 2004. "Money, Technology Choice and Pattern of Exchange in Search Equilibrium," Econometric Society 2004 North American Summer Meetings 212, Econometric Society.
    4. Laing, Derek & Li, Victor E. & Wang, Ping, 2007. "Inflation and productive activity in a multiple-matching model of money," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1949-1961, October.

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    Keywords

    Inflation (Finance) ; Prices ; Production (Economic theory);

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