The Effects of Inflation on Market Participation and Search Intensity

Abstract

Inflation leads individuals to work harder to spend and not carry their money holdings. Two alternative margins have been used to model this effect: the extensive margin (the frequency of shopping per period) and the intensive margin (the average shopping time per trip). This paper investigates how inflation affects these two margins. It deviates from the previous literature by allowing individuals to vary both margins simultaneously. The analysis reveals that the impact of inflation on these two margins is determined by the interaction between the opportunity cost of carrying money and direct search costs.

Unemployment and the Demand for Money

“…7 We think this shortcut may have some advantages to the extent of which Okun's Law is stable. 8 First, 6 Recent papers in the unemployment literature have also studied financial frictions in over-the-counter markets (Rocheteau and Lopez, 2014), households' unsecured debt (Bethune et al, 2015), the housing market (Branch et al, 2016), and the effects of inflation on market participation and search intensity (Huangfu, 2018). For an extensive survey of the search and unemployment literature, we refer to Rogerson et al (2005) and Lagos et al (2017).…”