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Capacity choice, monetary trade, and the cost of inflation

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  • Baughman, Garth
  • Rabinovich, Stanislav

Abstract

Both buyers and sellers in decentralized markets make investments ex ante that constrain trading possibilities ex post: buyers decide in advance how much money to carry, while sellers decide how much inventory to stock. We show that the interaction between these choices naturally leads to indeterminacy of equilibrium. When neither inflation nor the scrap value of unsold goods is high, there is a continuum of equilibria in which buyers and sellers coordinate on their choices of money balances and capacity. Furthermore, at low inflation rates, traded quantities are pinned down by the seller’s capacity choice, and inflation therefore has no effect on output and welfare. We also contrast our results with other environments with strategic complementarities and discuss how they depend on the pricing mechanism.

Suggested Citation

  • Baughman, Garth & Rabinovich, Stanislav, 2021. "Capacity choice, monetary trade, and the cost of inflation," European Economic Review, Elsevier, vol. 134(C).
    • Handle: RePEc:eee:eecrev:v:134:y:2021:i:c:s0014292121000519
    DOI: 10.1016/j.euroecorev.2021.103698
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    Cited by:

    1. Lebeau, Lucie, 2020. "Credit frictions and participation in over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 189(C).

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    More about this item

    Keywords

    Search; Money; Capacity; New monetarism; Inflation;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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