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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 labor 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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Cited by:
  1. Geert Bekaert & Xiaozheng Wang, 2010. "Inflation risk and the inflation risk premium," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 25, pages 755-806, October.
  2. Yaz Terajima & Jose-Victor Rıos-Rull & Cesaire A. Meh & Shutao Cao, 2010. "Inflation, Nominal Debt, Housing, and Welfare," 2010 Meeting Papers, Society for Economic Dynamics 979, Society for Economic Dynamics.
  3. 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, Elsevier, vol. 57(6), pages 637-652, September.
  4. Joshua Aizenman & Nancy Marion, 2009. "Using Inflation to Erode the U.S. Public Debt," NBER Working Papers 15562, National Bureau of Economic Research, Inc.
  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. Scott Dressler, 2012. "A Long-run, Short-run, and Politico-Economic Analysis of the Welfare Costs of Inflation," 2012 Meeting Papers, Society for Economic Dynamics 546, Society for Economic Dynamics.
  7. Glover, Andrew & Heathcote, Jonathan & Krueger, Dirk & Ríos-Rull, José-Víctor, 2011. "Intergenerational Redistribution in the Great Recession," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8329, C.E.P.R. Discussion Papers.
  8. 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, International Journal of Central Banking, vol. 9(2), pages 57-82, June.
  9. Sunel, Enes, 2010. "On inflation, wealth inequality and welfare in emerging economies," MPRA Paper 25943, University Library of Munich, Germany.

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