Inflation Reduces Market Power, Leading to More Responsive Prices
The article explores how prices react to changes in costs and money growth in a monetary search economy. Prices don't adjust fully to these changes due to shifts in consumers' search behavior, leading to incomplete price adjustments. As inflation increases, market power decreases, making prices more responsive to shocks. This aligns with real-world observations. The study shows that price adjustments to cost and money growth shocks increase with inflation rates, inflation variance rises with average inflation, and positive and negative money growth shocks have different impacts.