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Search, Sticky Prices, and Inflation

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  • Peter A. Diamond

Abstract

This paper examines equilibrium in a market with free entry where consumers search and firms set prices on individual units of the commodity. The prices attached to newly produced goods are continuously adjusted. Prices attached to previously produced goods can only be changed at a cost. Thus inflation reduces the real price of goods in inventory awaiting sale. The presence of previously priced goods lowers the reservation price of customers. Thus, inflation cuts into the market power created by the need to search for the good. Consumer welfare is inverse u-shaped in inflation with a strictly positive optimal inflation rate.
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Suggested Citation

  • Peter A. Diamond, 1988. "Search, Sticky Prices, and Inflation," Working papers 509, Massachusetts Institute of Technology (MIT), Department of Economics.
  • Handle: RePEc:mit:worpap:509
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    1. Stiglitz, Joseph E., 1983. "Some aspects of the taxation of capital gains," Journal of Public Economics, Elsevier, pages 257-294.
    2. James M. Poterba, 1986. "How Burdensome are Capital Gains Taxes?," NBER Working Papers 1871, National Bureau of Economic Research, Inc.
    3. Alan J. Auerbach, 1988. "Capital Gains Taxation in the United States: Realizations, Revenue, and Rhetoric," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 595-638.
    4. Poterba, James M., 1987. "How burdensome are capital gains taxes?: Evidence from the United States," Journal of Public Economics, Elsevier, vol. 33(2), pages 157-172, July.
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