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Search, sticky prices and deflation

By Peter Diamond and Leonardo Felli


This paper examines equilibrium in a deflationary environment, in a market with free entry where consumers search and firms set prices on individual units of the commodity. Prices attached to newly produced goods are continuously adjusted. Prices attached to previously produced goods can only be changed at a cost. Deflation cuts into the market power created by the need to search for the good. Thus consumers' welfare is inverse u-shaped in deflation

Topics: HB Economic Theory
Year: 1993
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Provided by: LSE Research Online
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