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Demographics, Redistribution, and Optimal Inflation

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Author Info

  • James Bullard

    (President and Chief Executive Officer, Federal Reserve Bank of St. Louis)

  • Carlos Garriga

    (Research Officer, Federal Reserve Bank of St. Louis)

  • Christopher J. Waller

    (Senior Vice President and Director of Research, Federal Reserve Bank of St. Louis (E-mail: cwaller@stls.frb.org))

Abstract

We study the interaction between population demographics, the desire for redistribution in the economy, and the optimal inflation rate in a deterministic economy with capital. The intergenerational redistribution tension is intrinsic in the general equilibrium life-cycle models we use. Young cohorts do not initially have any assets and wages are the main source of income; they prefer relatively low real interest rates, relatively high wages, and relatively high rates of inflation. Older generations work less and prefer higher rates of return from their savings, relatively low wages, and relatively low inflation. In the absence of intergenerational redistribution via lump-sum taxes and transfers, the constrained efficient competitive equilibrium entails optimal distortions on relative prices. We allow the planner to use inflation to try to achieve the optimal distortions. In the economy changes in the population structure are interpreted as the ability of a particular cohort to influence the redistributive policy. When the old have more influence on the redistributive policy, the economy has a relatively low steady state level of capital and a relatively low steady state rate of inflation. The opposite happens as young cohorts have more control of policy. These results suggest that aging population structures like those in Japan may contribute to observed low rates of inflation or even deflation.

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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 12-E-13.

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Date of creation: Sep 2012
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Handle: RePEc:ime:imedps:12-e-13

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Keywords: monetary policy; inflation bias; deflation; central bank design;

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  1. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, Elsevier, vol. 28(1), pages 59-83, October.
  2. Carlos Garriga & Fernando Sánchez-Losada, 2009. "Estate taxation with warm-glow altruism," Portuguese Economic Journal, Springer, Springer, vol. 8(2), pages 99-118, August.
  3. Bullard, James & Waller, Christopher J, 2004. "Central Bank Design in General Equilibrium," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(1), pages 95-113, February.
  4. Dávila, Julio, 2012. "The taxation of capital returns in overlapping generations models," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(2), pages 441-453.
  5. W. G. Gale & J. K. Scholz, . "Intergenerational transfers and the accumulation of wealth," Institute for Research on Poverty Discussion Papers, University of Wisconsin Institute for Research on Poverty 1019-93, University of Wisconsin Institute for Research on Poverty.
  6. Carlos Garriga-Calvet, 2000. "Optimal Fiscal Policy in Overlapping Generations Models," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1772, Econometric Society.
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