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Incomplete markets and the output-inflation tradeoff

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  • Yann Algan

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris, UPEM - Université Paris-Est Marne-la-Vallée - Université Paris-Est Marne-la-Vallée (UPEMLV))

  • Edouard Challe

    (CEREG - Centre d'études et de recherches sur l'espace germanophone - Université Paris III - Sorbonne nouvelle)

  • Xavier Ragot

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

Abstract

This paper analyses the effects of money shocks on macroeconomic aggregates in a flexible-price, incomplete-markets environment that generates persistent wealth inequalities amongst agents. In this framework, unexpected money shocks redistribute wealth from the cash-rich employed to the cash-poor unemployed, and induce the former to increase their labour supply in order to maintain their desired levels of consumption and precautionary savings. The reduced-form dynamics of the model is a textbook "output-inflation tradeoff" equation whereby inflation shocks raise current output. The attenuating role of mean inflation and money growth persistence on this non-neutrality tradeoff, as well as some of the welfare implications of wealth redistribution, are also examined.

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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number halshs-00589134.

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Date of creation: Mar 2008
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Handle: RePEc:hal:psewpa:halshs-00589134

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Keywords: incomplete markets ; borrowing constraints ; short-run nonneutrality;

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References

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  1. Timothy J. Kehoe & David K. Levine & Michael Woodford, 1992. "The Optimum Quantity of Money Revisited," Levine's Working Paper Archive 2035, David K. Levine.
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  4. Matthias Doepke & Martin Schneider, 2006. "Aggregate Implications of Wealth Redistribution: The Case of Inflation," UCLA Economics Working Papers, UCLA Department of Economics 846, UCLA Department of Economics.
  5. David K. Levine, 1991. "Asset Trading Mechanisms and Expansionary Policy," Levine's Working Paper Archive 43, David K. Levine.
  6. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
  7. Edward J. Green & Ruilin Zhou, 1996. "A Rudimentary Random-Matching Model with Divisible Money and Prices," GE, Growth, Math methods, EconWPA 9606001, EconWPA, revised 25 Jul 1996.
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  9. Camera, Gabriele & Corbae, Dean, 1999. "Money and Price Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 985-1008, November.
  10. Akyol, Ahmet, 2004. "Optimal monetary policy in an economy with incomplete markets and idiosyncratic risk," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(6), pages 1245-1269, September.
  11. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, American Economic Association, vol. 63(3), pages 326-34, June.
  12. Aleksander Berentsen & Gabriele Camera & Christopher Waller, . "The Distribution of Money Balances and the Non-Neutrality of Money," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 220, Institute for Empirical Research in Economics - University of Zurich.
  13. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, Econometric Society, vol. 69(3), pages 575-98, May.
  14. Imrohoroglu, Ayse, 1992. "The welfare cost of inflation under imperfect insurance," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 16(1), pages 79-91, January.
  15. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 219-34, February.
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Cited by:
  1. Francesco Lippi & Stefania Ragni & Nicholas Trachter, 2013. "State Dependent Monetary Policy," EIEF Working Papers Series 1324, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2013.
  2. Edouard Challe & Xavier Ragot, 2010. "Aggregate Consumption in Times of Crisis: The Role of Financial Frictions -super-1," CESifo Economic Studies, CESifo, CESifo, vol. 56(4), pages 627-648, December.
  3. Takashi Kamihigashi, 2013. "Elementary Results on Solutions to the Bellman Equation of Dynamic Programming:Existence, Uniqueness, and Convergence," Discussion Paper Series, Research Institute for Economics & Business Administration, Kobe University DP2013-35, Research Institute for Economics & Business Administration, Kobe University, revised Dec 2013.
  4. Takashi Kamihigashi, 2013. "An Order-Theoretic Approach to Dynamic Programming: An Exposition," Discussion Paper Series, Research Institute for Economics & Business Administration, Kobe University DP2013-29, Research Institute for Economics & Business Administration, Kobe University, revised Nov 2013.

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