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Search frictions in good markets and CPI inflation

Author

Listed:
  • Masashige Hamano

    (Waseda University)

  • Philip Schnattinger

    (Bank of England)

  • Kongphop Wongkaew

    (Waseda University)

Abstract

We develop a New Keynesian DSGE model to examine how preference shifts between online and brick-and-mortar retail affect pricing dynamics and inflation. Central to our model are goods market search frictions, which govern the interaction between retailers and producers. We introduce distinct search efficiencies for online and brick-and-mortar retailers, capturing the evolving retail landscape. Our analysis reveals two key channels through which these frictions impact inflation: the composition channel, arising from differing search efficiencies, and the arbitrage channel, reflecting changes in market tightness. Both channels operate through the search friction mechanism, altering the wedge between consumer and producer prices. Bayesian estimation identifies that both channels reinforce each other, lowering CPI inflation. This research highlights the critical role of goods market search frictions in understanding modern inflation dynamics.

Suggested Citation

  • Masashige Hamano & Philip Schnattinger & Kongphop Wongkaew, 2025. "Search frictions in good markets and CPI inflation," Working Papers 2420, Waseda University, Faculty of Political Science and Economics.
    • Handle: RePEc:wap:wpaper:2420
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    References listed on IDEAS

    as
    1. Mei Dong & Toshiaki Shoji & Yuki Teranishi, 2021. "Product Cycles and Prices: a Search Foundation," Working Papers e161, Tokyo Center for Economic Research.
    2. Vivien Lewis, 2006. "Macroeconomic fluctuations and firm entry: theory and evidence," Computing in Economics and Finance 2006 112, Society for Computational Economics.
    3. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 299-353, National Bureau of Economic Research, Inc.
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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