Price Rigidity and Means of Payment
Young Sik Kim
School of Economics, Seoul National University
Department of Economics, Korea University
February 28, 2012
Seoul Journal of Economics, Vol. 25, No. 1, pp. 111-135, 2012
The trade-off between cash and a debit card as a means of payment is incorporated into a search-theoretic model. A buyer incurs the proportional cost of carrying cash into the decentralized goods market, and a seller accepting a debit card bears a fixed record-keeping cost. In an equilibrium, the price of a cash good turns out to be relatively sticky compared with that of a debit-card good. With money supply increasing at a constant rate, the carrying cost of cash proportional to its amount causes the cash balance net of cost to increase at a rate less than the money growth rate. Consumption smoothing also leads to a relatively small decrease in quantity traded in comparison with the increase in cash balance, implying rigid price. Further, the means-of-payment mechanism underlying price rigidity yields an additional distortionary effect of inflation on relative price between cash trade and debit-card trade, which implies higher welfare cost of inflation than that in the standard search-based model.
Number of Pages in PDF File: 26
Keywords: cash, debit card, price rigidity
JEL Classification: E40, E41Accepted Paper Series
Date posted: March 14, 2012
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