The consequences of price inestability on search markets: a quantitative assessment

Abstract

This paper calibrates the model of a real economy in which inflation is introduced as an idiosyncratic shock to firms’ costs. Inflation induces relative price variability, eroding long-term relationships between customers and firms. We calibrate the model using a data set of individual prices of Argentina due to Álvarez, Beraja, Gonzalez-Rozada and Neumeyer. We find that there is not a good match between the model and the data. The model finds it particularly difficult to account for price dispersion in a context of price stability.