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Aggregate and Welfare Effects of Redistribution of Wealth Under Inflation and Price-Level Targeting

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  • Césaire A. Meh
  • José-Victor Rios-Rull
  • Yaz Terajima

Abstract

Since the work of Doepke and Schneider (2006a) and Meh and Terajima (2008), we know that inflation causes major redistribution of wealth - between households and the government, between nationals and foreigners, and between households within the same country. Two types of monetary policy, inflation targeting (IT) and price level targeting (PT), have very different implications for the price level path subsequent to a price-level shock, and consequently, have different redistributional properties which is what we explore in this paper. For Canada, we show that the magnitude of redistributions of an unexpected 1% price-level increase under IT is about three times larger than under PT. Households' and foreigners' wealth losses from a price level increase is matched by the gains of the government. Even though this redistribution is zero-sum, we observe positive effects on GDP due to the wealth loss, the lower value of the debt and its associated fiscal adjustment, and the non-linear effects on work effort of the redistribution of wealth across households. Finally, the direction of the change in the weighted welfare of households depends on the fiscal policy.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 08-31.

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Length: 53 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bca:bocawp:08-31

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Keywords: Economic models; Monetary policy framework; Sectoral balance sheet; Inflation: costs and benefits; Inflation targets; Inflation and prices;

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References

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  1. Matthias Doepke & Martin Schneider, 2006. "Inflation and the Redistribution of Nominal Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1069-1097, December.
  2. Agathe Côté, 2007. "Price-Level Targeting," Discussion Papers 07-8, Bank of Canada.
  3. Svensson, Lars E O, 1996. "Price-level Targeting versus Inflation Targeting: A Free Lunch?," CEPR Discussion Papers 1510, C.E.P.R. Discussion Papers.
  4. Andrés Erosa & Gustavo Ventura, 2000. "On Inflation as a Regressive Consumption Tax," UWO Department of Economics Working Papers 20001, University of Western Ontario, Department of Economics.
  5. Burnside, A Craig & Eichenbaum, Martin & Rebelo, Sérgio, 2003. "Government Finance in the Wake of Currency Crises," CEPR Discussion Papers 3939, C.E.P.R. Discussion Papers.
  6. Doepke, Matthias & Schneider, Martin, 2006. "Inflation as a Redistribution Shock: Effects on Aggregates and Welfare," CEPR Discussion Papers 5939, C.E.P.R. Discussion Papers.
  7. Allan M. Maslove & J. C. R. Rowley, 1975. "Inflation and Redistribution," Canadian Journal of Economics, Canadian Economics Association, vol. 8(3), pages 399-409, August.
  8. Vítor Gaspar & Frank Smets & David Vestin, 2007. "Is Time Ripe for Price Level Path Stability?," Working Papers w200719, Banco de Portugal, Economics and Research Department.
  9. Vestin, David, 2006. "Price-level versus inflation targeting," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1361-1376, October.
  10. Stefania Albanesi, 2002. "Inflation and Inequality," Macroeconomics 0201002, EconWPA.
  11. Drolet, Marie & Morissette, Rene, 1997. "Working More? Working Less? What Do Canadian Workers Prefer?," Analytical Studies Branch Research Paper Series 1997104e, Statistics Canada, Analytical Studies Branch.
  12. Bach, G L & Stephenson, James B, 1974. "Inflation and the Redistribution of Wealth," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 1-13, February.
  13. Steve Ambler, 2007. "Price-Level Targeting and Stabilization Policy: A Review," Discussion Papers 07-11, Bank of Canada.
  14. Césaire Meh & Yaz Terajima, 2008. "Inflation, Nominal Portfolios, and Wealth Redistribution in Canada," Working Papers 08-19, Bank of Canada.
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