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| Author: | Kim, Y. S. Yao, S. |
| Title: | Liquidity, quality, production cost, and welfare in a search model of money |
| Journal: | Economic Journal
2001 : JAN, VOL. 111:468, p. 114-127 |
| Index terms: | LIQUIDITY CONSTRAINTS QUALITY PRODUCTION PRODUCTION COSTS WELFARE MONEY |
| Language: | eng |
| 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. |
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