Price Setting, Price Dispersion, and the Value of Money - or - The Law of Two Prices

Curtis, Elisabeth Soller; Wright, Randall

doi:10.26509/frbc-wp-200209

Cited by 19 publications

(39 citation statements)

References 7 publications

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“…In case (iii), some buyers observe exactly one price whereas others observe more and Proposition 1 establishes that any SME necessarily exhibits dispersion of real prices. The price dispersion exhibited by this equilibrium differs from that of Curtis and Wright (2003) in two ways. First, in the dispersed price equilibrium of their model, generically the price distribution is concentrated on exactly two discrete prices, whereas here the distribution is continuous with connected support.…”

mentioning

confidence: 84%

“…Our article also contributes to the recent literature on price dispersion in search‐theoretic monetary models. Curtis and Wright (2003) construct a model of price posting and exchange among ex ante identical agents in which consumers receive preference shocks and are thus heterogeneous ex post. In their model, if a stationary monetary equilibrium exists, then there is an equilibrium with price dispersion in which exchange takes place only at two discrete prices.…”

Section: Introductionmentioning

confidence: 99%

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Price Dispersion, Inflation, and Welfare*

Head

Kumar

2005

Int Economic Review

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Several empirical studies have documented a positive relationship between the rate of inflation and the dispersion of consumer prices. We examine this relationship and the welfare costs of inflation in a monetary economy in which ex ante identical buyers search among prices posted by identical sellers. Under certain conditions, stationary monetary equilibria of our economy necessarily exhibit dispersion of real prices. If the degree of buyers' incomplete information about posted prices is fixed exogenously, both price dispersion and the average real price are increasing in the inflation rate. Money creation lowers welfare by increasing the market power of sellers and exacerbating the effects of the inflation tax. As the rate of inflation approaches the Friedman rule, price dispersion and welfare costs both vanish. If households choose the number of prices to observe, then the Friedman rule is not optimal. Rather, up to some point increased inflation lowers the average real price and raises welfare by inducing search and eroding sellers' market power.

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confidence: 84%

Section: Introductionmentioning

confidence: 99%

Price Dispersion, Inflation, and Welfare*

Head

Kumar

2005

Int Economic Review

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“…The instantaneous utility function of buyers and sellers in the centralized market is simply x, where x is the net consumption flow of general goods. 7 Given this specification, producing the general good for oneself is worthless. Buyers and sellers 5 The assumption that trades take place in both centralized and decentralized markets was introduced by Lagos and Wright (2005).…”

Section: Agents' Trading Behaviorsmentioning

confidence: 99%

“…Definition 3 A steady-state monetary equilibrium with menu cost is a list (z, n, τ ) that satisfies (5), (7) and, if π > 0, (25), or if π < 0, (26).…”

Section: Sticky Pricesmentioning

confidence: 99%

State-Dependent Pricing, Inflation, and Welfare in Search Economies

Craig¹,

Rocheteau²

2005

Working Paper (Federal Reserve Bank of Cleveland)

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This paper investigates the welfare effects of inflation in economies with search frictions and menu costs. We first analyze an economy where there is no transaction demand for money balances: Money is a mere unit of account. We determine a condition under which price stability is optimal and a condition under which positive inflation is desirable. We relate these conditions to a standard efficiency condition for search economies. Second, we consider a related economy in which there is a transaction role for money. In the absence of menu costs, the Friedman rule is optimal. In the presence of menu costs, the optimal inflation rate is negative for all our numerical examples. A deviation from the Friedman rule can be optimal depending on the extent of the search externalities.

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“…Other solution concepts can also be used:Curtis and Wright (2004) use price posting;Julien et al (2008) use auctions in a version with some multilateral meetings; and Zhou (2007a,2007b) use mechanism design.…”

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confidence: 99%

New Monetarist Economics: Models

Williamson¹,

Wright

2010

Preprint

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The purpose of this paper is to discuss some of the models used in New Monetarist Economics, which is our label for a body of recent work on money, banking, payments systems, asset markets, and related topics. A key principle in New Monetarism is that solid microfoundations are critical for understanding monetary issues. We survey recent papers on monetary theory, showing how they build on common foundations. We then lay out a tractable benchmark version of the model that allows us to address a variety of issues. We use it to analyze some classic economic topics, like the welfare effects of inflation, the relationship between money and capital accumulation, and the Phillips curve. We also extend the benchmark model in new ways, and show how it can be used to generate new insights in the study of payments, banking, and asset markets. * This essay was written as a chapter for the new Handbook of Monetary Economics, which is being edited by Benjamin Friedman and Michael Woodford. We thank the editors, as well as Boragan Aruoba, Guillaume Rocheteau, Robert Shimer, Jiang Shi, Liang Wang and Lucy Liu for useful discussions and comments. We thank the NSF for financial support. Wright also thanks the Ray Zemon Chair in Liquid Assets at the Wisconsin School of Business. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Banks of Richmond,

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Price Setting, Price Dispersion, and the Value of Money - or - The Law of Two Prices

Cited by 19 publications

References 7 publications

Price Dispersion, Inflation, and Welfare*

Price Dispersion, Inflation, and Welfare*

State-Dependent Pricing, Inflation, and Welfare in Search Economies

New Monetarist Economics: Models

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