Inflationary Redistribution vs . Trading Opportunities : Cost of Inflation in a Monetary Model with Non - degenerate Distributions ∗

We propose a monetary model which features endogenous market incompleteness. Our framework combines the tractable features of competitive search with matching frictions of Menzio et al. (2013) with a costly participation model in a centralized market with complete insurance. Equilibrium market incompleteness arises because of: (i) an externality trading off matching opportunities with consumption in nonWalrasian markets where money becomes essential; and (ii) agents have to make costly participation decisions to enter complete consumption insurance markets. We identify two types of opposing (i.e., intensive-versus-extensive) margins of trade-offs in the face of anticipated inflation tax. Numerically, we find that the extensive margins tend to dominate, resulting in average welfare falling and wealth inequality rising with inflation. We also propose a novel computational solution method, taking insights from computational geometry, to efficiently solve for a monetary equilibrium. JEL Codes: E0; E4; E5; E6; C6