Money, price dispersion and welfare

Brian Peterson () and Shouyong Shi

Economic Theory, 2004, vol. 24, issue 4, 907-932

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. Copyright Springer-Verlag Berlin/Heidelberg 2004

Keywords: Inflation; Price dispersion; Search; Efficiency. (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (16)

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Chapter: Money, price dispersion and welfare (2006)
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DOI: 10.1007/s00199-003-0465-1

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