Consumer Choice and the Cost of Inflation; Sephorah Mangin (ANU)

Abstract

Is inflation more or less costly when consumers have a greater degree of informed choice about their purchases? To answer this question, we introduce consumer choice into a competitive search model of monetary exchange. Buyers can meet multiple sellers and choose a seller with whom to trade. Prior to trade, consumers receive utility shocks that are private information. When these shocks are observed before choosing a seller, we call this informed choice. We calibrate the model to U.S. data and find that a greater degree of informed choice amplifies the negative welfare effects of inflation, making it significantly more costly.