A Divisible Search Model of Fiat Money

Money, price dispersion and welfare

“…The model incorporates the setup of heterogeneous goods and preferences from [12] into the search monetary framework in [18,19] with divisible money and goods. Goods are perfectly divisible, non-storable, and their types are identified by points on a circle of circumference 2.…”

“…Our model generates endogenous velocity of money, as in related models such as [18,19,3,20]. Denoted V, velocity is defined in the usual way as the ratio of nominal output to the money stock.…”

“…The structure of the model is a blend between [12] and [18,19]. From [12] we borrow the fundamental trading frictions that make money essential.…”

“…Also borrowed from [12] are heterogeneous preferences, whose role will be described later. We embed these elements into the structure in [18,19], where the basic decision unit is a large household whose members share the matching risks. This integrated structure allows us to tractably analyze how money growth and inflation affect money's ability to efficiently allocate goods across heterogeneous consumers.…”

“…Also, the shift in consumption to mediocre goods requires that the buyers in mediocre matches spend a higher percentage of their money holdings. Thus, velocity of money rises, as in [18,19,3,20].…”