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- Monetary and Macroprudential Policy Rules in a Model with House Price Booms by Kannan, Prakash/ Rabanal, Pau and Scott, Alasdair M.
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- In search of lost time: the neoclassical synthesis by De Vroey, Michel and Duarte, Pedro Garcia
Inflation, Prices, and Information in Competitive Search
1University of Toronto, email@example.com
2Universidad Carlos III de Madrid, firstname.lastname@example.org
Citation Information: Advances in Macroeconomics. Volume 6, Issue 1, Pages 1–34, ISSN (Online) 1534-6013, DOI: 10.2202/1534-6013.1313, September 2006
- Published Online:
We study the effects of inflation in a competitive search model where each buyer's utility is private information, and money is essential. 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. As inflation rises, sellers post relatively flat price schedules, which reduce the need for 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 model fits historical US data on velocity and interest rates.