Abstract

PARRA CELY, Sergio. Inflation Costs in a Search Monetary Model with Endogeneous Price Setting: The Case of Colombia. Ens. polit. econ. [online]. 2009, vol.27, n.59, pp. 46-81. ISSN 0120-4483.

Recent findings in theoretical search monetary models not only allow greater understanding of the exchange process as a monetary phenomena, but give answers to relevant monetary policy questions as the welfare cost of inflation. This paper is a contribution to the literature that tries to explain and calculate these costs for the recent experience in Colombia. Using the Simulated Method of Moments estimator (SMM) to calibrate the canonical model proposed by Rocheteau Waller (2005), we find that, under a endogeneous price setting mechanism, these costs oscilate between 0.5% and 7% of GDP, depending on certain conditions. These results are higher than early approaches due to other elements inside this model, like the presence of externalities in the intensive and extensive margin of search, composition of market, and market power, that have not been included in past research.

Keywords : inflation; search; money; simulated method of moments; Colombia.