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Endogenous Search, Price Dispersion, and Welfare

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  • Liang Wang

    (Assistant Professor at the University of Hawaii Manoa)

Abstract

This paper studies the welfare cost of ináation 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 e§ect. The aggregate e§ect of these three channels on welfare is non-monotonic. Additionally, the welfare cost of ináation áuctuations is negligible.

Suggested Citation

  • Liang Wang, 2016. "Endogenous Search, Price Dispersion, and Welfare," Working Papers 201616, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:201616
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    Cited by:

    1. Hongfei Sun & Chenggang Zhou, 2018. "Monetary and fiscal policies in a heterogeneous‐agent economy," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(3), pages 747-783, August.
    2. Lucas Herrenbrueck, 2018. "Instability of endogenous price dispersion equilibria: A simulation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(4), pages 1363-1385, November.
    3. Ayman Mnasri & Beverly Lapham, 2023. "A competitive search approach to exchange rate pass-through," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(1), pages 153-201, July.
    4. Lucy Qian Liu & Liang Wang & Randall Wright, 2015. "Costly Credit and Sticky Prices," Working Papers 201505, University of Hawaii at Manoa, Department of Economics.
    5. Aleksander Berentsen & Samuel Huber & Alessandro Marchesiani, 2018. "Limited Commitment and the Demand for Money," Economic Journal, Royal Economic Society, vol. 128(610), pages 1128-1156, May.
    6. Baughman, Garth & Rabinovich, Stanislav, 2019. "Self-confirming price dispersion in monetary economies," Journal of Economic Theory, Elsevier, vol. 183(C), pages 284-311.
    7. Liang Wang & Randall Wright & Lucy Qian Liu, 2020. "Sticky Prices And Costly Credit," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(1), pages 37-70, February.
    8. Beverly Lapham & Ayman Mnasri, 2019. "Exchange Rate Pass-Through: A Competitive Search Approach," Working Paper 1418, Economics Department, Queen's University.
    9. Geromichalos, Athanasios & Jung, Kuk Mo, 2024. "Heterogeneous asset valuation in OTC markets and optimal inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 161(C).

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    More about this item

    Keywords

    Consumer Search; Inflation; Price Dispersion; Welfare;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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