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Inflation as a Redistribution Shock: Effects on Aggregates and Welfare

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  • Schneider, Martin
  • Doepke, Matthias

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.

Suggested Citation

  • Schneider, Martin & Doepke, Matthias, 2006. "Inflation as a Redistribution Shock: Effects on Aggregates and Welfare," CEPR Discussion Papers 5939, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5939
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    Cited by:

    1. 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.
    2. Garriga, Carlos & Kydland, Finn E. & Šustek, Roman, 2021. "MoNK: Mortgages in a New-Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 123(C).
    3. 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.
    4. Dressler, Scott, 2016. "A long-run, short-run, and politico-economic analysis of the welfare costs of inflation," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 255-269.
    5. Andrew Glover & Jonathan Heathcote & Dirk Krueger & José-Víctor Ríos-Rull, 2020. "Intergenerational Redistribution in the Great Recession," Journal of Political Economy, University of Chicago Press, vol. 128(10), pages 3730-3778.
    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. Ferrari, Alessandro, 2023. "Losers amongst the Losers:," Research in Economics, Elsevier, vol. 77(1), pages 34-59.
    9. Bampinas, Georgios & Panagiotidis, Theodore, 2016. "Hedging inflation with individual US stocks: A long-run portfolio analysis," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 374-392.
    10. Rodrigo Lluberas & Juan Odriozola, 2015. "Inflation, currency depreciation and households balance sheet in Uruguay," Documentos de trabajo 2015009, Banco Central del Uruguay.
    11. Adam, Klaus & Tzamourani, Panagiota, 2016. "Distributional consequences of asset price inflation in the Euro Area," European Economic Review, Elsevier, vol. 89(C), pages 172-192.
    12. Ferrari, Alessandro, 2020. "Losers amongst the losers: the welfare effects of the Great Recession across cohorts," Working Paper Series 2509, European Central Bank.
    13. Nasir Munir & Sadaf Shahab & Muhammad Tariq Mehmood, 2022. "Financial Risk Management and Transmission Mechanism of Monetary Policy: An Empirical Evidence from Pakistan," Journal of Economic Impact, Science Impact Publishers, vol. 4(2), pages 75-82.
    14. Aizenman, Joshua & Marion, Nancy, 2011. "Using inflation to erode the US public debt," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 524-541.
    15. Sunel, Enes, 2010. "On inflation, wealth inequality and welfare in emerging economies," MPRA Paper 25943, University Library of Munich, Germany.
    16. Sunel, Enes, 2012. "Transitional Dynamics of Disinflation in a Small Open Economy with Heterogeneous Agents," MPRA Paper 39690, University Library of Munich, Germany.
    17. Schneider, Martin, 2014. "Redistribution effects of inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 49(C), pages 49-51.
    18. 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.

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    More about this item

    Keywords

    Aggregate effects; inflation; Redistribution; Welfare;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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