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Inflation and economic activity in a multiple matching model of money

Derek Laing (), Victor E. Li and Ping Wang ()

No 1998-018, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper investigates the relationship between money growth, inflation, and productive activity in a general equilibrium model where search frictions motivate the transactions role of money. The use of a multiple matching technique, where search frictions are captured by limited consumption variety, allows us to study price determination in a search-theoretic environment with divisible money and goods. We find that in such a setting, a positive feedback between work and shopping effort decisions create a channel by which inflation can positively influence real activity. This feature also creates the possibility of multiple steady state equilibria. We also analyze the impact of inflation on capital accumulation, the role search frictions play in determining the extent to which inflation distorts relative prices, and the effect of money growth on firm entry on trade friction. In doing so, we demonstrate that a multiple matching model of money is amendable to study a wide range of traditional issues in monetary theory.

Keywords: Inflation (Finance); Money; Econometric models (search for similar items in EconPapers)
Date: 1998
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Handle: RePEc:fip:fedlwp:1998-018