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Inflation, inequality, and welfare in a competitive search model

Published online by Cambridge University Press:  26 May 2025

Timothy Kam Open the ORCID record for Timothy Kam [Opens in a new window] ,
Tina Kao  and
Junsang Lee
Timothy Kam*
Affiliation:
Research School of Economics, The Australian National University, Canberra, Australia
Tina Kao
Affiliation:
Research School of Economics, The Australian National University, Canberra, Australia
Junsang Lee
Affiliation:
Department of Economics, Sungkyunkwan University, Seoul, Republic of Korea
*
Corresponding author: Timothy Kam; Email: tcy.kam@gmail.com
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Abstract

We study long-run inflation in a competitive-search model with heterogeneous agents. Under competitive search, individuals’ matching-probability (extensive) margins trade off against quantity (intensive) margins. With money and unfettered market participation, these trade-offs depend on inflation and individuals’ heterogeneous money holdings. We find that welfare falls as inflation increases. However, money-holdings inequality is not monotonic in inflation. As inflation rises, liquid-wealth inequality first falls. For sufficiently high inflation, the overall extensive-margin effect dominates the intensive margin, and liquid-wealth inequality rises. The model also poses a new computational challenge to which we propose a novel solution method.

Keywords

Competitive searchinflationdistributional trade-offscomputational geometryE0E4E5E6C6
Type
Articles
Information
Macroeconomic Dynamics , Volume 29 , 2025 , e110
Copyright
© The Author(s), 2025. Published by Cambridge University Press

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