Endogenous search, price dispersion, and welfare

Liang Wang

Journal of Economic Dynamics and Control, 2016, vol. 73, issue C, 94-117

Abstract: This paper studies the welfare cost of inflation in a frictional monetary economy with endogenous consumer search. Equilibrium entails price dispersion, where sellers compete for buyers by posting prices. We identify three channels through which inflation affects welfare. The real balance channel is the source of welfare loss. Its interaction with the price posting channel generates a welfare cost larger than Lucas (2000). The search channel reduces the welfare cost by more than one half through general equilibrium effect. The aggregate effect of these three channels on welfare is non-monotonic. Additionally, the welfare cost of inflation fluctuations is negligible.

Keywords: Consumer search; Inflation; Price dispersion; Welfare (search for similar items in EconPapers)
JEL-codes: D83 E31 E40 E50 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Endogenous Search, Price Dispersion, and Welfare (2016)
Working Paper: Endogenous Search, Price Dispersion, and Welfare (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:73:y:2016:i:c:p:94-117

DOI: 10.1016/j.jedc.2016.09.001

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