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Money, Price Dispersion and Welfare

  • Brian Peterson
  • Shouyong Shi

We introduce heterogeneous preferences into a tractable model of monetary search to generate price dispersion, and then examine the effects of money growth on price dispersion and welfare. With buyers' search intensity fixed, we find that money growth increases the range of (real) prices and lowers welfare as agents shift more of their consumption to less desirable goods. When buyers' search intensity is endogenous, multiple equilibria are possible. In the equilibrium with the highest welfare level, money growth reduces welfare and increases the range of prices, while having ambiguous effects on search intensity. However, there can be a welfare-inferior equilibrium in which an increase in money growth increases search intensity, increases welfare, and reduces the range of prices.

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File URL: http://www.economics.utoronto.ca/public/workingPapers/tecipa-191-1.pdf
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-191.

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Length: 25 pages
Date of creation: 13 Feb 2006
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-191
Contact details of provider: Postal: 150 St. George Street, Toronto, Ontario
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  1. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  2. Debelle, Guy & Lamont, Owen, 1997. "Relative Price Variability and Inflation: Evidence from U.S. Cities," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 132-52, February.
  3. Nobuhiro Kiyotaki & Randall Wright, 1989. "A contribution to the pure theory of money," Staff Report 123, Federal Reserve Bank of Minneapolis.
  4. Allen Head & Alok Kumar, 2004. "Price Dispersion, Inflation and Welfare," NajEcon Working Paper Reviews 122247000000000241, www.najecon.org.
  5. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, 2002. "Friedman Meets Hosios: Efficiency in Search Models of Money," Working Papers shouyong-02-04, University of Toronto, Department of Economics.
  6. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  7. Berentsen, Aleksander & Rocheteau, Guillaume, 2002. "On the efficiency of monetary exchange: how divisibility of money matters," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1621-1649, November.
  8. Reinsdorf, Marshall, 1994. "New Evidence on the Relation between Inflation and Price Dispersion," American Economic Review, American Economic Association, vol. 84(3), pages 720-31, June.
  9. 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.
  10. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  11. Benabou, Roland, 1992. "Inflation and Efficiency in Search Markets," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 299-329, April.
  12. Weimin Wang & Shouyong Shi, 2006. "The Variability of Velocity of Money in a Search Model," Working Papers tecipa-190, University of Toronto, Department of Economics.
  13. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
  14. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
  15. Aleksander Berentsen & Guillaume Rocheteau, . "Money and the Gains from Trade," IEW - Working Papers 100, Institute for Empirical Research in Economics - University of Zurich.
  16. Guillaume Rocheteau & Ricardo Lagos, 2004. "Superneutrality and the welfare effects of inflation," 2004 Meeting Papers 93, Society for Economic Dynamics.
  17. Camera, G. & Corbae, D., 1998. "Money and Price Dispersion," Working Papers 98-03, University of Iowa, Department of Economics.
  18. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  19. Benabou, Roland, 1988. "Search, Price Setting and Inflation," Review of Economic Studies, Wiley Blackwell, vol. 55(3), pages 353-76, July.
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