Money and price posting under private information

Abstract

We study price posting with undirected search in a search-theoretic monetary model with divisible money and divisible goods. Ex ante homogeneous buyers experience match specific preference shocks in bilateral trades. The shocks follow a continuous distribution and the realization of the shocks is private information. We show that generically there exists a unique price posting monetary equilibrium. In equilibrium, each seller posts a continuous pricing schedule that exhibits quantity discounts. Buyers spend only when they have high enough preferences. As their preferences are higher, they spend more till they become cash constrained. Since inflation reduces the future purchasing power of money and the value of retaining money, buyers tend to spend their money faster in response to higher inflation. In particular, more buyers choose to spend money and buyers spend on average a higher fraction of their money. The model naturally captures the hot potato effect of inflation along both the intensive margin and the extensive margin.

Sticky Prices: A New Monetarist Approach

“…10 10 Ennis (2008) and Dong and Jiang (2011), for example, study related monetary models where nonlinear pricing is used by sellers to elicit private information about buyers’ preferences. …”

Directed Search: A Guided Tour

“…In related work on Phillips curve correlations, Huangfu (2009) has private information about monetary shocks. Dong and Jiang (2014). In a model that is similar, but with indivisible goods, Carbonari et al (2017) get the optimal   0.…”

“…Let  * 1 ( 2 ) indicate the type on side 1 that matches with type  2 on side 2, and  * ( 2 ) the associated tightness, solving (69)- (70). Positive sorting means  * 0 (71) is stronger, because standard assumptions implies   0, as well as…”

The Effects of Inflation on Market Participation and Search Intensity

“…This is the so called ‘hot potato’ effect captured in the literature, such as Ennis (), Liu et al . (), Nosal (), and Dong and Jiang (). Interestingly, the model in this paper predicts that inflation also has a positive effect on the amount of goods traded.…”