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Inflation and Welfare in a Competitive Search Equilibrium with Asymmetric Information
Lorenzo Carbonari  1@  
1 : Università degli Studi di Roma Tor Vergata [Roma]
Via Orazio Raimondo,18 - 00173 Roma -  Italy

We study an economy characterised by indivisible goods, competitive search and asymmetric information. Money is essential. Buyers decide their cash holdings after observing the contracts posted by firms and experience match- specific preference shocks which remain unknown to sellers. Firms are allowed to post general contracts specifying a price and a probability to trade, but the optimal contract implies a single price so that only those who value the good more than that price are able to trade. When the number of potential buyers is bounded, we show that the real price of the good is decreasing in the rate of infla- tion and, consequently, in the nominal rate of interest. Because of asymmetric information and indivisibility, monetary policy can exploit this relationship, and welfare is maximised away from the Friedman rule. The same result, but for a different reason, is obtained when there is buyers free entry. At the Friedman rule, asymmetric information causes a congestion effect, and an inflationary monetary policy can improve ex ante welfare.


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