Money, price dispersion and welfare

Brian Peterson, Shouyong Shi

Research output: Contribution to journalArticle

14 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)907-932
Number of pages26
JournalEconomic Theory
Volume24
Issue number4
DOIs
StatePublished - Nov 1 2004

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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