Incomplete Markets and the Output-inflation Tradeoff
AbstractThis paper analyses the effects of money shocks on macroeconomic aggregates in a flexible-price, incomplete-markets environment that generates persistent wealth inequalities amongst agents. In this framework, unexpected money shocks redistribute wealth from the cash-rich employed to the cash-poor unemployed, and induce the former to increase their labour supply in order to maintain their desired levels of consumption and precautionary savings. The reduced-form dynamics of the model is a textbook "output-inflation tradeoff" equation whereby inflation shocks raise current output. The attenuating role of mean inflation and money growth persistence on this non-neutrality tradeoff, as well as some of the welfare implications of wealth redistribution, are also examined.
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Bibliographic InfoPaper provided by Sciences Po in its series Sciences Po publications with number 2006 - 45.
Date of creation: Mar 2008
Date of revision:
incomplete markets; borrowing constraints; short-run nonn-eutrality;
Other versions of this item:
- Yann Algan & Edouard Challe & Xavier Ragot, 2011. "Incomplete markets and the output–inflation tradeoff," Economic Theory, Springer, vol. 46(1), pages 55-84, January.
- Yann Algan & Edouard Challe & Xavier Ragot, 2008. "Incomplete markets and the output-inflation tradeoff," PSE Working Papers halshs-00589134, HAL.
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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