Institute of Economic Research, Seoul National University
Abstract
The trade-off between cash and a debit card as a means of payment
is incorporated into a search-theoretic model. A buyer incurs
the proportional cost of carrying cash into the decentralized goods
market, and a seller accepting a debit card bears a fixed recordkeeping
cost. In an equilibrium, the price of a cash good turns out
to be relatively sticky compared with that of a debit-card good. With
money supply increasing at a constant rate, the carrying cost of
cash proportional to its amount causes the cash balance net of cost
to increase at a rate less than the money growth rate. Consumption
smoothing also leads to a relatively small decrease in quantity traded
in comparison with the increase in cash balance, implying rigid price.
Further, the means-of-payment mechanism underlying price rigidity
yields an additional distortionary effect of inflation on relative price
between cash trade and debit-card trade, which implies higher welfare
cost of inflation than that in the standard search-based model
