Demographics, Redistribution, and Optimal Inflation
AbstractWe 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 InfoPaper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 12-E-13.
Date of creation: Sep 2012
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monetary policy; inflation bias; deflation; central bank design;
Other versions of this item:
- Bullard, James & Garriga, Carlos & Waller, Christopher J., 2012. "Demographics, redistribution, and optimal inflation," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 419-440.
- James Bullard & Carlos Garriga & Christopher J. Waller, 2012. "Demographics, redistribution, and optimal inflation," Speech 200, Federal Reserve Bank of St. Louis.
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- D7 - Microeconomics - - Analysis of Collective Decision-Making
This paper has been announced in the following NEP Reports:
- NEP-AGE-2012-09-30 (Economics of Ageing)
- NEP-ALL-2012-09-30 (All new papers)
- NEP-DGE-2012-09-30 (Dynamic General Equilibrium)
- NEP-MAC-2012-09-30 (Macroeconomics)
- NEP-MON-2012-09-30 (Monetary Economics)
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