Endogenous Search, Price Dispersion, and Welfare
This paper studies the welfare cost of inÃ¡ation in a frictional monetary economy with endogenous consumer search. Equilibrium entails price dispersion, where sellers compete for buyers by posting prices. We identify three channels through which inflation affects welfare. The real balance channel is the source of welfare loss. Its interaction with the price posting channel generates a welfare cost larger than Lucas (2000). The search channel reduces the welfare cost by more than one half through general equilibrium eÂ§ect. The aggregate eÂ§ect of these three channels on welfare is non-monotonic. Additionally, the welfare cost of inÃ¡ation Ã¡uctuations is negligible.
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