Inflation, Prices, and Information in Competitive Search

Miquel Faig and Belén Jerez

Working Papers from University of Toronto, Department of Economics

Abstract: We study the effects of inflation in a competitive search model where each buyer's utility is private information, and where money is essential in facilitating trade. The equilibrium is efficient at the Friedman rule, but inflation creates an inefficiency in the terms of trade. Buyers experience a preference shock after they are matched with a seller, and thus they have a precautionary motive for holding money. Sellers, who compete to attract buyers, post non-linear price schedules to screen out different types of buyers. As inflation rises, sellers post relatively flat price schedules which reduce the need for buyers to hold precautionary balances. These price schedules induce buyers with a low desire to consume to purchase inefficiently high quantities because of the low marginal cost of purchasing goods. In contrast, buyers with a high desire to consume purchase inefficiently low quantities as they face binding liquidity constraints. The reduction of precautionary balances as inflation rises allows the model to fit historical US data on velocity and interest rates.

Keywords: inflation; precautionary money demand; competitive search; private information. (search for similar items in EconPapers)
JEL-codes: D58 E40 E52 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2006-03-31
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Journal Article: Inflation, Prices, and Information in Competitive Search (2006)
Working Paper: Inflation, prices, and information in competitive search (2005)
Working Paper: Inflation, Prices, and Information in Competitive Search (2005)
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