Inflation and productive activity in a multiple-matching model of money

This paper investigates the relationship between money growth, inflation, and productive activity in a dynamic general-equilibrium, multiple-matching framework where trade frictions are manifested by limited consumption variety. Productive activity and matching in the goods market are endogenized by a time allocation decision of work and search effort. We find that a high degree of complementarity between participation in the labor and goods markets creates a channel by which inflation can positively influence production and output. This feature arises when household preferences for consumption variety is sufficiently large and it can also lead to the multiplicity of monetary equilibria. r 2006 Elsevier B.V. All rights reserved.