Responding to the Inflation Tax

Abstract

General rightsThis document is made available in accordance with publisher policies. Please cite only the published version using the reference above. AbstractWe adopt mechanism design to study the effects of inflation on output, trade, and capital accumulation. Our theory captures multiple channels for individuals to respond to inflation: search intensity, market participation, and substitution between money and a higher return asset. We characterize constrained efficient allocations and show inflation has non-monotonic effects on the frequency of trades (extensive margin) and the total quantity traded (intensive margin). The model features monetary superneutrality for low inflation rates, non-linearities in trading frequencies, and substitution of money for capital for higher inflation rates. While these effects are difficult to capture in previous models, we show how they are intimately related by all being features of an optimal trading mechanism.JEL classification: D82, D83, E40, E50.

Liquidity: A New Monetarist Perspective

“…Relatedly, in Nosal (2011) buyers spend money faster at higher  with random search because higher  reduces their reservation trade, endogenizing , as Kiyotaki and Wright (1991) did in a first-generation model. See also , , Jafarey and Masters (2003), Shi and Wang (2006), Faig and Jerez (2007), Ennis (2009) and Hu et al (2014). These exercises are germane because they concern duration analysis, for which search theory is well suited, and constitute models of velocity based on explicit search, entry or trading decisions.…”

The Effects of Inflation on Market Participation and Search Intensity

“…Previously, Shi (1998) endogenised search intensity in the Shi (1997) model and showed that it can increase with inflation. More recently, there have been several models based on the Lagos and Wright (2005) framework, including Lagos and Rocheteau (2005), Berentsen et al (2007), Liu et al (2011), and Hu and Zhang (2017). However, in all these approaches, individual behaviour has been modelled in such a fashion that only one margin can be adjusted.…”

“…The extensive margin itself has two margins here: the intensive margin (average shopping time per trip) and the extensive margin (frequency of shopping per period). 2 For example, Lagos and Rocheteau (2005), Berentsen et al (2007), and Hu and Zhang (2017) assume that individuals go shopping every day. As a result, only the intensive margin could possibly be affected by inflation.…”

“…(), Liu et al . (), and Hu and Zhang (). However, in all these approaches, individual behaviour has been modelled in such a fashion that only one margin can be adjusted .…”

“… For example, Lagos and Rocheteau (), Berentsen et al . (), and Hu and Zhang () assume that individuals go shopping every day. As a result, only the intensive margin could possibly be affected by inflation.…”