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Inflation and economic activity in a multiple matching model of money

  • Derek Laing
  • Victor E. Li
  • Ping Wang

This paper investigates the relationship between money growth, inflation, and productive activity in a general equilibrium model where search frictions motivate the transactions role of money. The use of a multiple matching technique, where search frictions are captured by limited consumption variety, allows us to study price determination in a search-theoretic environment with divisible money and goods. We find that in such a setting, a positive feedback between work and shopping effort decisions create a channel by which inflation can positively influence real activity. This feature also creates the possibility of multiple steady state equilibria. We also analyze the impact of inflation on capital accumulation, the role search frictions play in determining the extent to which inflation distorts relative prices, and the effect of money growth on firm entry on trade friction. In doing so, we demonstrate that a multiple matching model of money is amendable to study a wide range of traditional issues in monetary theory.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1998-018.

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Date of creation: 1998
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Handle: RePEc:fip:fedlwp:1998-018
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  1. Rogers, J.H. & Wang, P., 1990. "Sources of Fluctuations in Relative Prices: Evidence from High Inflation Countries," Papers 12-90-2, Pennsylvania State - Department of Economics.
  2. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
  3. repec:att:wimass:9715 is not listed on IDEAS
  4. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September.
  5. Trejos, Alberto & Wright, Randall, 1993. "Search, Bargaining, Money and Prices: Recent Results and Policy Implications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 558-76, August.
  6. Stanley Fischer, 1983. "Inflation and Growth," NBER Working Papers 1235, National Bureau of Economic Research, Inc.
  7. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280.
  8. Camera, G. & Corbae, D., 1998. "Money and Price Dispersion," Working Papers 98-03, University of Iowa, Department of Economics.
  9. Bennett T. McCallum & Marvin S. Goodfriend, 1986. "Theoretical analysis of the demand for money," Working Paper 86-03, Federal Reserve Bank of Richmond.
  10. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  11. Edward J. Green & Ruilin Zhou, . ""A Rudimentary Model of Search with Divisible Money and Prices''," CARESS Working Papres 95-17, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  12. Li, Victor E., 1994. "Inventory accumulation in a search-based monetary economy," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 511-536, December.
  13. Diamond, Peter & Yellin, Joel, 1990. "Inventories and Money Holdings in a Search Economy," Econometrica, Econometric Society, vol. 58(4), pages 929-50, July.
  14. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  15. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  16. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
  17. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  18. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
  19. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  20. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  21. Drazen, Allan, 1981. "Inflation and capital accumulation under a finite horizon," Journal of Monetary Economics, Elsevier, vol. 8(2), pages 247-260.
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