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Liquidity, Quality, Production Cost, and Welfare in a Search Model of Money

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  • Kim, Young Sik
  • Yao, Shuntian

Abstract

This paper examines a search model of money with divisible commodities of high and low quality, while keeping the assumptions of indivisible money and unit-inventory constraint. With no direct barter and a higher fixed cost of producing high relative to low quality, an increase in the money stock encourages the production of high-quality output by trading off the larger trading opportunities against the significance of higher fixed cost. As long as the fixed-cost differential between high and low quality is sufficiently small relative to the utility gain from high-quality consumption, the quality improvement outweighs the negative effect of higher money stocks on aggregate production, and hence implies higher welfare.

Suggested Citation

  • Kim, Young Sik & Yao, Shuntian, 2001. "Liquidity, Quality, Production Cost, and Welfare in a Search Model of Money," Economic Journal, Royal Economic Society, vol. 111(468), pages 114-127, January.
    • Handle: RePEc:ecj:econjl:v:111:y:2001:i:468:p:114-27
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    Cited by:

    1. Jun Zhang & Haibin Wu, 2004. "Money, Technology Choice and Pattern of Exchange in Search Equilibrium," Econometric Society 2004 North American Summer Meetings 212, Econometric Society.

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