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The Burden Of Unanticipated Inflation: Analysis Of An Overlapping-Generations Model With Progressive Income Taxation And Staggered Prices

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  • Heer, Burkhard
  • Maußner, Alfred

Abstract

Inflation is often associated with a loss for the poor in the medium and long term. We study the short-run redistributive effects of unanticipated inflation in a dynamic optimizing sticky price model of the business cycle. Agents are heterogeneous with regard to their age and their productivity. We emphasize three channels of the effect of inflation on income distribution: (1) factor prices, (2) “bracket creep,” and (3) sticky pensions. Unanticipated inflation that is caused by monetary expansion is found to reduce income inequality. In particular, an increase of the money growth rate by one standard deviation results in a 1% drop of the Gini coefficient of disposable income if extra tax revenues are transferred lump-sum to the households.

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  • Heer, Burkhard & Maußner, Alfred, 2012. "The Burden Of Unanticipated Inflation: Analysis Of An Overlapping-Generations Model With Progressive Income Taxation And Staggered Prices," Macroeconomic Dynamics, Cambridge University Press, vol. 16(2), pages 278-308, April.
    • Handle: RePEc:cup:macdyn:v:16:y:2012:i:02:p:278-308_00
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    Cited by:

    1. Yann Algan & Olivier Allais & Edouard Challe & Xavier Ragot, 2012. "Monetary Shocks Under Incomplete Markets," Sciences Po publications info:hdl:2441/1j0a1p4ifa9, Sciences Po.
    2. Olivier Allais & Yann Algan & Edouard Challe & Xavier Ragot, 2020. "The Welfare Cost of Inflation Risk under Imperfect Insurance," Annals of Economics and Statistics, GENES, issue 138, pages 1-20.
    3. repec:hal:spmain:info:hdl:2441/562ju27dra9dnp6j4nvhq0tgfq is not listed on IDEAS
    4. Yann Algan & Xavier Ragot, 2010. "Monetary policy with Heterogeneous Agents and Borrowing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 295-316, April.
    5. Heer, Burkhard & Süssmuth, Bernd, 2013. "Tax bracket creep and its effects on income distribution," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 393-408.
    6. Mehmet Balcilar & Shinhye Chang & Rangan Gupta & Stephen M. Miller, 2018. "The relationship between the inflation rate and inequality across U.S. states: a semiparametric approach," Quality & Quantity: International Journal of Methodology, Springer, vol. 52(5), pages 2413-2425, September.
    7. Cao, Shutao & Meh, Césaire A. & Ríos-Rull, José-Víctor & Terajima, Yaz, 2021. "The welfare cost of inflation revisited: The role of financial innovation and household heterogeneity," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 366-380.
    8. Burkhard Heer & Alfred Maußner, 2024. "Dynamic General Equilibrium Modeling," Springer Texts in Business and Economics, Springer, edition 3, number 978-3-031-51681-8, August.
    9. Burkhard Heer, 2007. "On the Modeling of the Income Distribution Business Cycle Dynamics," CESifo Working Paper Series 1945, CESifo.
    10. Katagiri, Mitsuru & Konishi, Hideki & Ueda, Kozo, 2020. "Aging and deflation from a fiscal perspective," Journal of Monetary Economics, Elsevier, vol. 111(C), pages 1-15.
    11. Larin, Benjamin, 2016. "Bubble-driven business cycles," Working Papers 143, University of Leipzig, Faculty of Economics and Management Science.
    12. Scharrer Christian, 2021. "The effects of financing rules in pay-as-you-go pension systems on the life and the business cycle," German Economic Review, De Gruyter, vol. 22(4), pages 489-511, November.
    13. repec:hal:spmain:info:hdl:2441/1j0a1p4ifa98paomt4907gu4qo is not listed on IDEAS
    14. N'Yilimon Nantob, 2015. "Income Inequality and Inflation in Developing Countries: An Empirical Investigation," Economics Bulletin, AccessEcon, vol. 35(4), pages 2888-2902.
    15. Arkadiusz Sieron, 2017. "Inflation and Income Inequality," Prague Economic Papers, Prague University of Economics and Business, vol. 2017(6), pages 633-645.
    16. Chang, Wen-ya & Chen, Ying-an & Chang, Juin-jen, 2013. "Growth and welfare effects of monetary policy with endogenous fertility," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 117-130.
    17. Nasfi Fkili Wahiba & Mahmoudi Dina, 2023. "Technological Change, Growth and Income Inequality," International Journal of Economics and Financial Issues, Econjournals, vol. 13(1), pages 121-131, January.
    18. Masaya Yasuoka, 2018. "Money and Pay-As-You-Go Pension," Economies, MDPI, vol. 6(2), pages 1-15, March.
    19. repec:prg:jnlpep:v:preprint:id:630:p:1-13 is not listed on IDEAS
    20. repec:hal:spmain:info:hdl:2441/3ao9avev669hj9hvol1l0lr6im is not listed on IDEAS
    21. Pierre Monnin, 2014. "Inflation and Income Inequality in Developed Economies," Working Papers 1401, Council on Economic Policies.
    22. Gozluklu, Arie & Morin, Annaïg, 2019. "Stock vs. Bond yields and demographic fluctuations," Journal of Banking & Finance, Elsevier, vol. 109(C).

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    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D30 - Microeconomics - - Distribution - - - General

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