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Financial Sophistication and the Distribution of the Welfare Cost of Inflation

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  • Paola Boel
  • Gabriele Camera

Abstract

The welfare cost of anticipated inflation is quantified in a calibrated model of the U.S. economy that exhibits tractable equilibrium dispersion in wealth and earnings. Inflation does not generate large losses in societal welfare, yet its impact varies noticeably across segments of society depending also on the financial sophistication of the economy. If money is the only asset, then inflation hurts mostly the wealthier and more productive agents, while those poorer and less productive may even benefit from inflation. The converse holds in a more sophisticated financial environment where agents can insure against consumption risk with assets other than money.

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Bibliographic Info

Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1222.

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Length: 52 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:pur:prukra:1222

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Keywords: money; heterogeneity; friedman rule; trade frictions; calibration;

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  1. Reed, Robert R. & Waller, Christopher J., 2006. "Money and Risk Sharing," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(6), pages 1599-1618, September.
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  3. Boel, Paola & Camera, Gabriele, 2006. "Efficient monetary allocations and the illiquidity of bonds," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(7), pages 1693-1715, October.
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  8. Boel, Paola & Camera, Gabriele, 2009. "Financial sophistication and the distribution of the welfare cost of inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(7), pages 968-978, October.
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  15. 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.
  16. Jonathan Chiu & Miguel Molico, 2011. "Uncertainty, Inflation, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43, pages 487-512, October.
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Citations

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Cited by:
  1. Gaetano Antinolfi & Costas Azariadis & James B. Bullard, 2007. "The optimal inflation target in an economy with limited enforcement," Working Papers, Federal Reserve Bank of St. Louis 2007-037, Federal Reserve Bank of St. Louis.
  2. Camera, Gabriele & Chien, YiLi, 2013. "Two monetary models with alternating markets," SAFE Working Paper Series, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt 33, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  3. Rocheteau, Guillaume, 2012. "The cost of inflation: A mechanism design approach," Journal of Economic Theory, Elsevier, Elsevier, vol. 147(3), pages 1261-1279.
  4. Boel, Paola & Camera, Gabriele, 2009. "Financial sophistication and the distribution of the welfare cost of inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(7), pages 968-978, October.
  5. Boel, Paola, 2013. "On the Redistributive Effects of Inflation: an International Perspective," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 274, Sveriges Riksbank (Central Bank of Sweden), revised 01 Nov 2013.
  6. Gabriele Camera & YiLi Chien, 2012. "Understanding the distributional impact of long-run inflation," Working Papers, Federal Reserve Bank of St. Louis 2012-058, Federal Reserve Bank of St. Louis.
  7. Gabriele Camera & YiLi Chien, 2013. "Modeling monetary economies: an equivalence result," Working Papers, Federal Reserve Bank of St. Louis 2013-009, Federal Reserve Bank of St. Louis.
  8. Andr� C. Silva, 2012. "Rebalancing Frequency and the Welfare Cost of Inflation," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 4(2), pages 153-83, April.

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