Essays on inflation in random -matching models

Essay 1. The effects of anticipated inflation on the yield of a real asset. This essay studies the effects of inflation on a near-money's real price and return in a search model, in which agents use token money endogenously. The effects can vary markedly over the parameter space. In particular, there are regions of the parameter space for which inflation raises the real asset price and lowers the real asset return, as is suggested by the Tobin asset substitution theory. There also are regions of the parameter space in which inflation has the opposite effects.;Essay 2. Incomplete record-keeping, optimal payment arrangements, and the welfare cost of anticipated inflation. Recent technological advances have vastly improved record-keeping, and it has been shown (Kocherlakota 1998) that in a broad class of environments a perfect record of individuals' trading histories supports decentralized trade at least as well as currency. This essay studies the welfare cost of inflation in a model in which individual trading histories become public knowledge with a stochastic lag. Inflation is added to the model via a cost of holding money, to provide a motive to economize on the use of money and thus to rely on the public record. Optimum production as a function of the average updating lag and the cost of holding money are studied numerically for a parameterized version of the model. The optimal incentive-constrained trading pattern typically is distorted to compensate moneyholders for bearing the cost of inflation. A higher probability of record updating brings some elements of the production pattern closer their unconstrained optimum values and moves some elements farther from their unconstrained optimum values. Nevertheless, such better record-keeping unambiguously reduces the welfare cost of inflation.