Hostname: page-component-586b7cd67f-dlnhk Total loading time: 0 Render date: 2024-11-28T05:08:01.150Z Has data issue: false hasContentIssue false
  • English
  • Français

ON THE “HOT POTATO” EFFECT OF INFLATION: INTENSIVE VERSUS EXTENSIVE MARGINS

Published online by Cambridge University Press:  02 June 2011

Lucy Qian Liu ,
Liang Wang  and
Randall Wright
Lucy Qian Liu*
Affiliation:
International Monetary Fund
Liang Wang
Affiliation:
University of Hawaii at Manoa
Randall Wright
Affiliation:
University of Wisconsin and Federal Reserve Bank of Minneapolis
*
Address correspondence to: Lucy Qian Liu, HQ1-06-504, MCD, Division C, International Monetary Fund, 700 19th Street, N.W., Washington, DC 20431, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

Conventional wisdom is that inflation makes people spend money faster, trying to get rid of it like a “hot potato,” and this is a channel through which inflation affects velocity and welfare. Monetary theory with endogenous search intensity seems ideal for studying this. However, in standard models, inflation is a tax that lowers the surplus from monetary exchange and hence reduces search effort. We replace search intensity with a free entry (participation) decision for buyers—i.e., we focus on the extensive rather than intensive margin—and prove buyers always spend their money faster when inflation increases. We also discuss welfare.

Keywords

SearchInflationVelocityFree Entry
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Supplement S2: Money, Credit, and Liquidity: Part 2 , September 2011 , pp. 191 - 216
Copyright
Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Alvarez, Fernando, Lucas, Robert, and Weber, Warren (2008) Long Run Money Demand and the Liquidity Effect in Segmented Markets. University of Chicago manuscript.Google Scholar
Aruoba, S.Boragan, Christopher Waller, and Wright, Randall (2009) Money and Capital: A Quantitative Analysis. University of Maryland manuscript.CrossRefGoogle Scholar
Berentsen, Aleksander, Molico, Miguel, and Wright, Randall (2002) Indivisibilities, lotteries, and monetary exchange. Journal of Economic Theory 107, 70–94.CrossRefGoogle Scholar
Burdett, Kenneth, Trejos, Alberto, and Wright, Randall (2001) Cigarette money. Journal of Economic Theory 99, 117–142.CrossRefGoogle Scholar
Chiu, Jonathan and Molico, Miguel (2007) Liquidity, Redistribution, and the Welfare Cost of Inflation. Bank of Canada Working Paper 2007-39.Google Scholar
Dong, Mei and Jiang, Janet Hua (2009) Money and Price Posting under Private Information. University of Manitoba manuscript.Google Scholar
Ennis, Huberto (2008) Avoiding the inflation tax. International Economic Review 50, 607–625.CrossRefGoogle Scholar
Friedman, Milton and Schwartz, Anna J. (1963) A Monetary History of the United States, 1867–1960, Princeton, NJ: Princeton University Press.Google Scholar
Green, Edward and Zhou, Ruilin (1998) A rudimentary model of search with divisible money and prices. Journal of Economic Theory 81, 252–271.CrossRefGoogle Scholar
Hosios, Arthur J. (1990) On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57, 279–298.CrossRefGoogle Scholar
Jean, Kasie, Rabinovoch, Stan, and Wright, Randall (2010) On the multiplicity of monetary equilibria: Green–Zhou meets Lagos–Wright. Journal of Economic Theory 145, 392–401.CrossRefGoogle Scholar
Keynes, John Maynard (1924) A Tract on Monetary Reform. Amherst, NY: Prometheus Books.Google Scholar
Khan, Aubhik and Thomas, Julia (2007) Inflation and Interest Rates with Endogenous Market Segmentation. Federal Reserve Bank of Philadelphia Working Paper No. 07-1.Google Scholar
Kiyotaki, Nobuhiro and Wright, Randall (1993) A search-theoretic approach to monetary economics. American Economic Review 83, 63–77.Google Scholar
Lagos, Ricardo and Rocheteau, Guillaume (2005) Inflation, output, and welfare. International Economic Review 46, 495–522.CrossRefGoogle Scholar
Lagos, Ricardo and Wright, Randall (2005) A unified framework for monetary theory and policy analysis. Journal of Political Economy 113, 463–484.CrossRefGoogle Scholar
Li, Victor (1994) Inventory accumulation in a search-based monetary economy. Journal of Monetary Economics 34, 511–536.CrossRefGoogle Scholar
Li, Victor (1995) The optimal taxation of fiat money in search equilibrium. International Economic Review 36, 927–942.CrossRefGoogle Scholar
Lucas, Robert Jr., (2000) Inflation and welfare. Econometrica 68, 247–274.CrossRefGoogle Scholar
Molico, Miguel (2006) The distribution of money and prices in search equilibrium. International Economic Review 47, 701–722.CrossRefGoogle Scholar
Mortensen, Dale (1987) Job search and labor market analysis. In Ashenfelter, O. and Layard, R. (eds.), Handbook of Labor Economics, Vol. 2, Amsterdam: North-Holland.Google Scholar
Nosal, Ed (2008) Search, Welfare and the Hot Potato Effect of Inflation. Federal Reserve Bank of Chicago Policy Discussion Paper Series 2008-8.Google Scholar
Nosal, Ed and Rocheteau, Guillaume (2009) Monetary policy, the cost of inflation, and the Friedman rule. In preparation.Google Scholar
Pissarides, Christopher (2000) Equilibrium Unemployment Theory. Cambridge, MA: MIT Press.Google Scholar
Rocheteau, Guillaume and Wright, Randall (2005) Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium. Econometrica 73, 175–202.CrossRefGoogle Scholar
Rubinstein, Ariel and Wolinsky, Asher (1987) Middlemen. Quarterly Journal of Economics 102, 581–594.CrossRefGoogle Scholar
Rupert, Peter, Schindler, Martin, and Wright, Randall (2001) Generalized bargaining models of monetary exchange. Journal of Monetary Economics 48, 605–622.CrossRefGoogle Scholar
Shi, Shouyong (1997) A divisible search model of fiat money. Econometrica 65, 75–102.CrossRefGoogle Scholar
Shi, Shouyong (1998) Search for a monetary propagation mechanism. Journal of Economic Theory 81, 314–352.CrossRefGoogle Scholar
Trejos, Alberto and Wright, Randall (1995) Search, bargaining, money and prices. Journal of Political Economy 103, 118–141.CrossRefGoogle Scholar