Search, money, and inflation under private information

____________________________________________________________ I study a version of the Lagos-Wright (2003) model of monetary exchange in which buyers have private information about their tastes and sellers make take-it-or-leave-it-offers (i.e., have the power to set prices and quantities). The introduction of imperfect information makes the existence of monetary equilibrium a more robust feature of the environment. In general, the model has a monetary steady state in which only a proportion of the agents hold money. Agents who do not hold money cannot participate in trade in the decentralized market. The proportion of agents holding money is endogenous and depends (negatively) on the level of expected inflation. As in Lagos and Wright's model, in equilibrium there is a positive welfare cost of expected inflation, but the origins of this cost are very different. ______________________________________________________________________________ * [email protected]. Research Department, Federal Reserve Bank of Richmond, P.O. Box 27622, Richmond, Virginia 23261. Ph. (804) 697-8988. I thank Todd Keister, Randall Wright, the participants at the 2004 Summer Workshop on Money, Banking, and Payments at the Cleveland Fed, and seminar participants at the Minneapolis Fed for useful comments on a previous draft. I also benefited from patient discussions and comments from my colleagues at the Richmond Fed. The usual disclaimers apply. The views expressed here are those of the author and do not necessarily reflect those of the Federal Reserve Banks of Minneapolis, Richmond or the Federal Reserve System.