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Search Frictions in Good Markets and CPI Inflation

Author

Listed:
  • Masashige Hamano
  • Philip Schnattinger
  • Kongphop Wongkaew

Abstract

We develop a New Keynesian model to analyze how shifts in consumer preferences toward online retailers affect pricing dynamics and inflation. Our framework incorporates goods market search frictions between retailers and producers, with distinct search efficiencies for online and brick-and-mortar retailers. Since search incurs costs, retailers pass these costs on to consumers, creating a wedge between consumer and producer prices. Our analysis identifies two key channels through which these frictions influence inflation: the composition channel, driven by the reallocation of purchases between retailer types with different search efficiencies, and the arbitrage channel, reflecting changes in market tightness due to shifting demand. Bayesian estimation shows that increased consumer preference for online retail lowers CPI inflation by increasing the share of goods purchased through search-efficient retailers while reducing market tightness in brick-and-mortar retail, thereby narrowing the price wedge.

Suggested Citation

  • Masashige Hamano & Philip Schnattinger & Kongphop Wongkaew, 2025. "Search Frictions in Good Markets and CPI Inflation," PIER Discussion Papers 230, Puey Ungphakorn Institute for Economic Research.
  • Handle: RePEc:pui:dpaper:230
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    More about this item

    Keywords

    Search and matching friction; CPI inflation; Firm dynamics;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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