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The real effect of inflation in liquidity constrained models

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  • Xavier Ragot

    (PJSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

Abstract

This article identifies a new channel through which inflation affects the real economy. In a simple monetary model where agents face heterogenous income flows, it is proven that credit constraints create heterogeneity in money demand. Because of this heterogeneity, long run inflation affects the real interest rate and real variables, even when there are no redistributive effects, no distorting fiscal policy, no substitution between leisure and working time, and when prices are flexible. For realistic utility functions, inflation is found to raise the capital stock, but to decrease welfare.

Suggested Citation

  • Xavier Ragot, 2005. "The real effect of inflation in liquidity constrained models," PSE Working Papers halshs-00590556, HAL.
    • Handle: RePEc:hal:psewpa:halshs-00590556
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00590556
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    References listed on IDEAS

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