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Inflation, Prices, and Information in Competitive Search
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Miquel Faig
Published/Copyright:
September 13, 2006
Abstract
We study the effects of inflation in a competitive search model where each buyer's utility is private information, and money is essential. The equilibrium is efficient at the Friedman rule, but inflation creates an inefficiency in the terms of trade. Buyers experience a preference shock after they are matched with a seller, and thus they have a precautionary motive for holding money. Sellers, who compete to attract buyers, post non-linear price schedules. As inflation rises, sellers post relatively flat price schedules, which reduce the need for precautionary balances. These price schedules induce buyers with a low desire to consume to purchase inefficiently high quantities because of the low marginal cost of purchasing goods. In contrast, buyers with a high desire to consume purchase inefficiently low quantities as they face binding liquidity constraints. The model fits historical US data on velocity and interest rates.
Published Online: 2006-09-13
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Keywords for this article
inflation;
precautionary money demand;
competitive search;
private information
Articles in the same Issue
- Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks
- Frontiers Article
- 10.2202/1534-6013.1320
- Advances Article
- Monetary Policy and Uncertainty about the Natural Unemployment Rate: Brainard-Style Conservatism versus Experimental Activism
- Quantifying the Effects of the Demographic Transition in Developing Economies
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- Uncertainty and Debt-Maturity in Emerging Markets
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