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Aggregate and Welfare Effects of Redistribution of Wealth Under Inflation and Price-Level Targeting

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  • Yaz Terajima

    (Bank of Canada)

  • Jose-Victor Rios-Rull

    (University of Minnesota)

  • Cesaire Meh

    (Bank of Canada)

Abstract

consequently, have different redistributional properties which is what we explore in this paper. For Canada, which has a positive net asset position with respect to the rest of the world in Canadian dollar-denominated claims, we show that the magnitude of the effects of an unexpected price level increase under IT is larger than under PT. Households’ wealth loss from a price level increase is matched by the gains of the government and foreigners. Even though this redistribution is zerosum, we observe positive effects on GDP due to the wealth loss, the lower value of the debt and its associated fiscal adjustment, and the non-linear effects on work effort of the redistribution of wealth across households. Although the effects on GDP are positive, the direction of the change in the weighted welfare of households depends on the fiscal policy.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 381.

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Date of creation: 2008
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Handle: RePEc:red:sed008:381

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  1. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2003. "Government Finance in the Wake of Currency Crises," NBER Working Papers 9786, National Bureau of Economic Research, Inc.
  2. Albanesi, Stefania, 2007. "Inflation and inequality," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1088-1114, May.
  3. Matthias Doepke & Martin Schneider, 2006. "Inflation and the Redistribution of Nominal Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1069-1097, December.
  4. Steve Ambler, 2007. "Price-Level Targeting and Stabilization Policy: A Review," Discussion Papers 07-11, Bank of Canada.
  5. Svensson, Lars E O, 1999. "Price-Level Targeting versus Inflation Targeting: A Free Lunch?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 277-95, August.
  6. Doepke, Matthias & Schneider, Martin, 2006. "Inflation as a Redistribution Shock: Effects on Aggregates and Welfare," CEPR Discussion Papers 5939, C.E.P.R. Discussion Papers.
  7. Allan M. Maslove & J. C. R. Rowley, 1975. "Inflation and Redistribution," Canadian Journal of Economics, Canadian Economics Association, vol. 8(3), pages 399-409, August.
  8. Gaspar, Vítor & Smets, Frank & Vestin, David, 2007. "Is time ripe for price level path stability?," Working Paper Series 0818, European Central Bank.
  9. Drolet, Marie & Morissette, Rene, 1997. "Working More? Working Less? What Do Canadian Workers Prefer?," Analytical Studies Branch Research Paper Series 1997104e, Statistics Canada, Analytical Studies Branch.
  10. Vestin, David, 2006. "Price-level versus inflation targeting," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1361-1376, October.
  11. Agathe Côté, 2007. "Price-Level Targeting," Discussion Papers 07-8, Bank of Canada.
  12. Césaire Meh & Yaz Terajima, 2008. "Inflation, Nominal Portfolios, and Wealth Redistribution in Canada," Working Papers 08-19, Bank of Canada.
  13. Bach, G L & Stephenson, James B, 1974. "Inflation and the Redistribution of Wealth," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 1-13, February.
  14. Erosa, Andres & Ventura, Gustavo, 2002. "On inflation as a regressive consumption tax," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 761-795, May.
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