Money, Price Dispersion and Welfare

Brian Peterson () and Shouyong Shi ()

Working Papers from University of Toronto, Department of Economics

Abstract: 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.

Keywords: Price dispersion; Search; Efficiency (search for similar items in EconPapers)
JEL-codes: E31 D60 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2006-02-13
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Journal Article: Money, price dispersion and welfare (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:tor:tecipa:tecipa-191

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