Liquidity, Quality, Production Cost, and Welfare in a Search Model of Money

Young Sik Kim and Shuntian Yao

Economic Journal, 2001, vol. 111, issue 468, 114-27

Abstract: This paper examines a search model of money with divisible commodities of high and low quality, while keeping the assumptions of indivisible money and unit-inventory constraint. With no direct barter and a higher fixed cost of producing high relative to low quality, an increase in the money stock encourages the production of high-quality output by trading off the larger trading opportunities against the significance of higher fixed cost. As long as the fixed-cost differential between high and low quality is sufficiently small relative to the utility gain from high-quality consumption, the quality improvement outweighs the negative effect of higher money stocks on aggregate production, and hence implies higher welfare.

Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:ecj:econjl:v:111:y:2001:i:468:p:114-27

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