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Inflation as a Redistribution Shock: Effects on Aggregates and Welfare

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  • Matthias Doepke

Abstract

Episodes of unanticipated inflation reduce the real value of nominal claims and thus redistribute wealth from lenders to borrowers. In this study, we consider redistribution as a channel for aggregate and welfare effects of inflation. We model an inflation episode as an unanticipated shock to the wealth distribution in a quantitative overlapping-generations model of the U.S. economy. While the redistribution shock is zero sum, households react asymmetrically, mostly because borrowers are younger on average than lenders. As a result, inflation generates a decrease in labour supply as well as an increase in savings. Even though inflation-induced redistribution has a persistent negative effect on output, it improves the weighted welfare of domestic households.

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Paper provided by UCLA Department of Economics in its series UCLA Economics Online Papers with number 412.

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Handle: RePEc:cla:uclaol:412

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Citations

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Cited by:
  1. Geert Bekaert & Xiaozheng Wang, 2010. "Inflation risk and the inflation risk premium," Economic Policy, CEPR & CES & MSH, vol. 25, pages 755-806, October.
  2. Andrew Glover & Jonathan Heathcote & Dirk Krueger & José-Víctor Ríos-Rull, 2011. "Intergenerational redistribution in the Great Recession," Working Papers 684, Federal Reserve Bank of Minneapolis.
  3. Evan F. Koenig, 2013. "Like a Good Neighbor: Monetary Policy, Financial Stability, and the Distribution of Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 57-82, June.
  4. Sunel, Enes, 2010. "On inflation, wealth inequality and welfare in emerging economies," MPRA Paper 25943, University Library of Munich, Germany.
  5. Sunel, Enes, 2012. "Transitional Dynamics of Disinflation in a Small Open Economy with Heterogeneous Agents," MPRA Paper 39690, University Library of Munich, Germany.
  6. Meh, Césaire A. & Ríos-Rull, José-Víctor & Terajima, Yaz, 2010. "Aggregate and welfare effects of redistribution of wealth under inflation and price-level targeting," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 637-652, September.
  7. Scott J. Dressler, 2011. "A Long-Run, Short-Run and Politico-Economic Analysis of the Welfare Costs of Inflation," Villanova School of Business Department of Economics and Statistics Working Paper Series 16, Villanova School of Business Department of Economics and Statistics.
  8. Joshua Aizenman & Nancy Marion, 2009. "Using Inflation to Erode the U.S. Public Debt," NBER Working Papers 15562, National Bureau of Economic Research, Inc.
  9. Yaz Terajima & Jose-Victor Rıos-Rull & Cesaire A. Meh & Shutao Cao, 2010. "Inflation, Nominal Debt, Housing, and Welfare," 2010 Meeting Papers 979, Society for Economic Dynamics.

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