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Competitive Search Equilibrium with Private Information on Monetary Shocks

Stella Huangfu ()

The B.E. Journal of Macroeconomics, 2009, vol. 9, issue 1, 1-27

Abstract: The relationship between unanticipated inflation and output has been a classic issue in macroeconomics. This paper studies the effects of monetary uncertainty on output in a competitive search environment where there is asymmetric information about monetary shocks. In such an environment, sellers post prices that are contingent on the realization of the shock, and buyers then direct their search towards the most attractive price. The paper proposes a new mechanism for real output effects of monetary shocks: when the realization of the monetary shock is privately observed by buyers, to induce truth-telling behavior, sellers offer more output when the economy experiences a positive monetary shock; otherwise, buyers have an incentive to lie about the state of the world in order to pay low prices. This contrasts with the centralized Walrasian market environment, where nominal shocks by themselves have no real effects.

Date: 2009
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