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Seoul Journal of Economics - Vol. 25 , No. 1
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Seoul Journal of Economics - Vol. 25, No. 1, pp. 111-135
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 29 Feb 2012
Received 04 May 2011 Revised 19 Jul 2011 Accepted 07 Sep 2011

Price Rigidity and Means of Payment
Young Sik Kim ; Manjong Lee
Professor, Department of Economics, Seoul National University, Shillim-dong, Kwanak-gu, Seoul 151-742, Korea, Tel: ＋82-2-880-6387, Fax: ＋82-2-886-4231 (kimy@snu.ac.kr)
Corresponding Author, Assistant Professor, Department of Economics, Korea University, Anam-dong, Seongbuk-gu, Seoul 136-701, Korea, Tel: ＋82-2-3290-2223, Fax: ＋82-2-3290-2200 (manjong@korea.ac.kr)

Funding Information ▼

JEL Classification: E40, E41

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 record-keeping 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.

Keywords: Cash, Debit card, Price rigidity
Acknowledgments

Manjong Lee acknowledges the financial support from Korea University.

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