On the “Hot Potato” Effect of Inflation: Intensive Versus Extensive Margins

Liu, Lucy Qian; Wang, Liang; Wright, Randall

doi:10.1017/s1365100511000046

Cited by 35 publications

(24 citation statements)

References 25 publications

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“…The information channel that affects the propensity for trade to occur means that velocity of money increases with inflation. This relationship has been documented in the data by Liu, Wang, and Wright ().…”

supporting

confidence: 63%

“…In concurrent research, two papers have attempted to capture the hot potato effect. Liu, Wang, and Wright () point out that models of endogenous search intensity cannot generate the effect because the reduction of gains from trade that come from the inflation tax make buyers less eager to trade at all . They show, however, that if buyers face an extensive margin decision (i.e., whether to enter the market or not), inflation causes fewer buyers to acquire cash, but due to an increase in their matching probability, those that do enter trade faster.…”

mentioning

confidence: 99%

“…Li () is able to generate a hot potato effect by endogenizing search intensity but, as Liu, Wang, and Wright () point out, it emerges a consequence of the indivisibility of money in his environment.…”

mentioning

confidence: 99%

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Inflation and Welfare in Retail Markets: Prior Production and Imperfectly Directed Search

Masters¹

2013

J of Money Credit Banking

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This paper considers the effect of monetary policy and inflation on retail markets: goods are dated and produced prior to being retailed; buyers direct their search on price and general quality; buyers' match-specific tastes are private information. Sellers set the same price for all buyers, some of whom do not value the good highly enough to buy it. The market economy is typically inefficient as a social planner would have the good consumed. Under free entry of sellers, the Friedman rule is optimal policy. When the upper bound on the number of participating sellers binds, moderate levels of inflation can be welfare improving.JEL codes: D82, E40 a discussion of how the alternative market structures considered in RW affects outcomes in this environment.

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supporting

confidence: 63%

mentioning

confidence: 99%

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Inflation and Welfare in Retail Markets: Prior Production and Imperfectly Directed Search

Masters¹

2013

J of Money Credit Banking

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“…Solve for from (22), and we need = (n)(u c) cns > 0 to assure c = 1. Since p c = > c 8 , (n)(u c) cns > (n)(u p c = ) nsp c = 0.…”

Section: Resultsmentioning

confidence: 99%

Asset liquidity and indivisibility

Han

Julien

Petursdottir

et al. 2019

European Economic Review

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We study asset liquidity in a search-theoretic framework where divisible assets can facilitate exchange for an indivisible consumption good. The distinctive characteristics of our theory are that the asset dividend can be either positive or negative and buyers can choose whether or not to carry the asset and trade for the indivisible good. Buyers' participation determines the demand for asset liquidity and hence asset price carries a component of liquidity premium to re ‡ect its function of trade facilitation. The economy features multiple equilibria when the asset dividend is negative, due to the trade-o¤ between the probability of trade and the endogenous cost of holding the asset. JEL: D51, E40, G12.

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“…The "hot potato" effect refers to the observation that consumers spend their money faster in times of high inflation. In a search based monetary theory model, Liu et al (2011) find that inflation affects especially the extensive margin of the purchasing decision.…”

Section: Extensive and Intensive Marginmentioning

confidence: 99%

Inflation Expectations and Consumer Spending: The Role of Household Balance Sheets

Lieb

Schuffels

2019

SSRN Journal

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Research interest in the reaction of consumption to expected inflation has increased sharply in recent years due to efforts by central banks to kick-start demand through higher inflation expectations. We contribute to this literature by analyzing whether various components of households' balance sheets determine how consumption reacts to expected inflation. Many channels are conceivable: an increase in inflation expectations can raise consumption through direct increases in expected real wealth, e.g. for households with nominal financial liabilities. By affecting the real interest rate, expected inflation can interact with wealth if only those households can adapt their consumption to current real interest rates that are not budget constrained or sufficiently liquid to shift funds between consumption and savings. We use household-level information on balance sheets, vehicle expenditures and inflation expectations from the Dutch Central Bank's Household Survey. We find evidence for a relation between a household's expected inflation and the probability to have positive expenditures on durables. This effect is stronger for households with low net worth. We find no evidence of such effects on the amount of durable expenditures.

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On the “Hot Potato” Effect of Inflation: Intensive Versus Extensive Margins

Cited by 35 publications

References 25 publications

Inflation and Welfare in Retail Markets: Prior Production and Imperfectly Directed Search

Inflation and Welfare in Retail Markets: Prior Production and Imperfectly Directed Search

Asset liquidity and indivisibility

Inflation Expectations and Consumer Spending: The Role of Household Balance Sheets

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