Your browser does not support the PubReader view.
Go to this page to see a list of supporting browsers.
Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 25, No. 1, pp.111-135
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

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.

References

  • Aliprantis, D., Camera, G., and Puzzello, D. “Anonymous Markets and Monetary Trading.” Journal of Monetary Economics 54 (No. 7 2007): 1905-28. [https://doi.org/10.1016/j.jmoneco.2006.11.002]
  • Bailey, M. “The Welfare Cost of Inflationary Finance.” Journal of Political Economy 64 (No. 5 1956): 93-110. [https://doi.org/10.1086/257766]
  • Baumol, W. “The Transactions Demand for Cash: An Inventory Theoretic Approach.” Quarterly Journal of Economics 66 (No. 4 1952): 545-56. [https://doi.org/10.2307/1882104]
  • Bils, M., and Klenow, P. “Some Evidence on the Importance of Sticky Prices.” Journal of Political Economy 112 (No. 5 2004): 947-85. [https://doi.org/10.1086/422559]
  • Blinder, A., Canetti, E., Lebow, D., and Rudd, J. Asking About Prices: A New Approach to Understanding Price Stickiness. New York: Russell Sage Foundation, 1998.
  • Boivin, J., Giannoni, M., and Mihov, I. “Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data.” American Economic Review 99 (No. 1 2009): 350-84. [https://doi.org/10.1257/aer.99.1.350]
  • Bounie, D., and Francois, A. “Cash, Check or Debit Card? The Effects of Transaction Characteristics on the Use of Payment Instruments.” Telecom ParisTech Working Paper, 2009.
  • Corbae, D., Temzelides, T., and Wright, R. “Directed Search and Monetary Exchange.” Econometrica 71 (No. 3 2003): 731-56. [https://doi.org/10.1111/1468-0262.00424]
  • Craig, B., and Rocheteau, G. “State-Dependent Pricing, Inflation, and Welfare in Search Economies.” European Economic Review 52 (No. 3 2008): 441-68. [https://doi.org/10.1016/j.euroecorev.2007.03.002]
  • Finkelstein, A. “E-Ztax: Tax Salience and Tax Rates.” Quarterly Journal of Economics 124 (No. 3 2009): 969-1010. [https://doi.org/10.1162/qjec.2009.124.3.969]
  • Freeman, S., and Kydland, F. “Monetary Aggregates and Output.” American Economic Review 90 (No. 5 2000): 1125-35. [https://doi.org/10.1257/aer.90.5.1125]
  • Golosov, M., and Lucas, R. “Menu Costs and Phillips Curves.” Journal of Political Economy 115 (No. 1 2007): 171-99. [https://doi.org/10.1086/512625]
  • Goodfriend, M., and King, R. “The New Neoclassical Synthesis and the Role of Monetary Policy.” NBER Macroeconomics Annual 12 (1997): 231-96. [https://doi.org/10.1086/654336]
  • He, P., Huang, L., and Wright, R. “Money, Banking, and Monetary Policy.” Journal of Monetary Economics 55 (No. 6 2008): 1013-24. [https://doi.org/10.1016/j.jmoneco.2008.06.004]
  • Head, A., Liu, L., Menzio, G., and Wright, R. Sticky Prices? Manuscript, Queen's University, 2010.
  • Humphrey, D. “Replacement of Cash by Cards in US Consumer Payments.” Journal of Economics and Business 56 (No. 3 2004): 211-25. [https://doi.org/10.1016/j.jeconbus.2003.09.001]
  • Jung, Y. “Staggered Price Settings, Exchange Rates, and Monetary Policy.” Seoul Journal of Economics 16 (No. 4 2003): 423-59.
  • Kackmeister, A. “Yesterday's Bad Times are Today's Good Old Times: Retail Price Changes Are More Frequent Today than in the 1890s.” Journal of Money, Credit and Banking 39 (No. 8 2007): 1988-2020. [https://doi.org/10.1111/j.1538-4616.2007.00095.x]
  • Karni, E. “The Transactions Demand for Cash: Incorporation of the Value of Time into the Inventory Approach.” Journal of Political Economy 81 (No. 5 1973): 1216-25. [https://doi.org/10.1086/260115]
  • Kim, Y. S., and Lee, M. “A Model of Debit Card as Means of Payment.” Journal of Economic Dynamics and Control 34 (No. 8 2010): 1359-68. [https://doi.org/10.1016/j.jedc.2010.03.003]
  • Knotek, E. “Convenient Prices and Price Rigidity: Cross-Sectional Evidence.” Review of Economics and Statistics, Forthcoming, 2010. [https://doi.org/10.2139/ssrn.1291864]
  • Knotek, E. “Convenient Prices, Currency, and Nominal Rigidity: Theory with Evidence from Newspaper Prices.” Journal of Monetary Economics 55 (No. 7 2008): 1303-16. [https://doi.org/10.1016/j.jmoneco.2008.07.009]
  • Kocherlakota, N. “Money is Memory.” Journal of Economic Theory 81 (No. 2 1998): 232-51. [https://doi.org/10.1006/jeth.1997.2357]
  • Lagos, R. “Asset Prices and Liquidity in an Exchange Economy.” Journal of Monetary Economics 57 (No. 8 2010): 913-30. [https://doi.org/10.1016/j.jmoneco.2010.10.006]
  • Lagos, R., and Rocheteau, G. “Money and Capital as Competing Media of Exchange.” Journal of Economic Theory 142 (No. 1 2008): 247-58. [https://doi.org/10.1016/j.jet.2006.07.005]
  • Lagos, R., and Wright, R. “A Unified Framework for Monetary Theory and Policy Analysis.” Journal of Political Economy 113 (No. 3 2005): 463-84. [https://doi.org/10.1086/429804]
  • Levy, D., and Young, A. “The Real Thing: Nominal Price Rigidity of the Nickel Coke, 1886-1959.” Journal of Money, Credit and Banking 36 (No. 4 2004): 765-99. [https://doi.org/10.1353/mcb.2004.0065]
  • Li, Y. Currency and Checking Deposits as Means of Payment. Manuscript, National Taiwan University, 2008.
  • Mankiw, G. “Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly.” Quarterly Journal of Economics 100 (No. 2 1985): 529-37. [https://doi.org/10.2307/1885395]
  • Mester, L. “Changes in the Use of Electronic Means of Payment: 1994-2004.” Federal Reserve Bank of Philadelphia Business Review (No. 2 2006): 26-30.
  • Prescott, E. “A Multiple Means of Payment Model.” In W. A. Barnett and K. J. Singleton (eds.), New Approaches to Monetary Economics. New York: Cambridge University Press, pp. 42-51, 1987. [https://doi.org/10.1017/CBO9780511759628.003]
  • Rotemberg, J. “Customer Anger at Price Increases, Changes in the Frequency of Price Adjustment and Monetary Policy.” Journal of Monetary Economics 52 (No. 4 2005): 829-52. [https://doi.org/10.1016/j.jmoneco.2005.03.004]
  • Smets, F., and Wouters, R. “An Estimated Stochastic Dynamic General Equilibrium Model of the Euro Area.” Journal of the European Economic Association 1 (No. 5 2003): 1123-75. [https://doi.org/10.1162/154247603770383415]
  • Telyukova, I., and Wright, R. “A Model of Money and Credit, with Application to the Credit Card Debt Puzzle.” Review of Economic Studies 75 (No. 2 2008): 629-47. [https://doi.org/10.1111/j.1467-937X.2008.00487.x]
  • Tobin, J. “The Interest-Elasticity of Transactions Demand for Cash.” Review of Economics and Statistics 38 (No. 3 1956): 241-7. [https://doi.org/10.2307/1925776]
  • Wallace, N. “Whither Monetary Economics?” International Economic Review 42 (No. 4 2001): 847-70. [https://doi.org/10.1111/1468-2354.00137]
  • Williamson, S. “Private Money.” Journal of Money, Credit and Banking 31 (No. 3 1999): 469-91. [https://doi.org/10.2307/2601065]
  • Williamson, S., and Wright, R. New Monetarist Economics. Manuscript, Washington University in St. Louis, 2009. [https://doi.org/10.20955/r.92.265-302]
  • Woodford, M. Interest and Prices: Foundations of a Theory of Monetary Policy. New York: Princeton University Press, 2003.
  • Yun, T. “Nominal Price Rigidity, Money Supply Endogeneity, and Business Cycles.” Journal of Monetary Economics 37 (No. 2 1996): 345-70. [https://doi.org/10.1016/S0304-3932(96)90040-9]
  • Zbaracki, M., Ritson, M., Levy, D., Dutta, S., and Bergen, M. “Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets.” Review of Economics and Statistics 86 (No. 2 2004): 514-33. [https://doi.org/10.1162/003465304323031085]