Inflation, Prices, and Information in Competitive Search

Miquel Faig () and Belén Jerez
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Belén Jerez: Universidad Carlos III de Madrid

The B.E. Journal of Macroeconomics, 2006, vol. advances.6, issue 1

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.

Keywords: inflation; precautionary money demand; competitive search; private information (search for similar items in EconPapers)
JEL-codes: E40 D83 E52 (search for similar items in EconPapers)
Date: 2006

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Related works:
Working Paper: INFLATION, PRICES, AND INFORMATION IN COMPETITIVE SEARCH (2005)
Working Paper: Inflation, Prices, and Information in Competitive Search (2006)
Working Paper: Inflation, Prices, and Information in Competitive Search (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:bpj:bejmac:v:advances.6:y:2006:i:1:n:3

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