Search frictions in good markets and CPI inflation

Masashige Hamano, Philip Schnattinger and Kongphop Wongkaew
Additional contact information
Philip Schnattinger: Bank of England
Kongphop Wongkaew: Waseda University

No 2420, Working Papers from Waseda University, Faculty of Political Science and Economics

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.

Keywords: Search and matching friction; CPI inflation; Firm dynamics (search for similar items in EconPapers)
JEL-codes: E31 E52 J64 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2025-02
New Economics Papers: this item is included in nep-dge and nep-mon
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Working Paper: Search Frictions in Good Markets and CPI Inflation (2025)
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