Liquidity, quality, production cost, and welfare in a search model of money

This paper examines a search model of money with divisible commodities of h igh and low quality, while keeping the assumptions of indivisible money and unit-inventory constraint. With no direct barter and a higher fixed cost o f producing high relative to low quality, an increase in the money stock en courages the production of high-quality output by trading off the larger tr ading opportunities against the significance of higher fixed cost As long a s the fixed-cost differential between high and low quality is sufficiently small I relative to the utility gain from high-quality consumption, the qua lity improvement outweighs the negative effect of higher money stocks on ag gregate production, and hence implies higher welfare.