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Deflation Forces and Inequality

Author

Listed:
  • Rod Tyers

    (Business School, University of Western Australia and Research School of Economics, Centre for Applied Macroeconomic Analysis (CAMA), Australian National University)

  • Yixiao Zhou

    (School of Economics and Finance, Curtin Business School, Curtin University)

Abstract

Proximity to short yield zero lower bounds has challenged the inflation targeting central banks of the advanced regions. Central to this development are three-decade declining trends in long yields and underlying real, equilibrium interest rates that have flattened yield curves, restricting “normalisation” and adding deflationary pressure by boosting demand for portfolio money. Inflationary forces, such as fiscal deficits, industrial protection and resurgent regional growth, have proved comparatively weak. In this paper global modelling is used to show that key deflationary forces in these regions include automation, the race to the bottom in capital taxation and immigration. Each is shown to redistribute income so as to expand the welfare gap between the low-skilled and capital owners by 2.5 to 3.5 per cent per year. The high saving rates of capital owners depress real equilibrium rates and their expanding portfolios demand monetary expansion. These forces ensure that the challenges of macro stabilisation and distributional policy making are both intertwined and urgent.

Suggested Citation

  • Rod Tyers & Yixiao Zhou, 2018. "Deflation Forces and Inequality," Economics Discussion / Working Papers 18-04, The University of Western Australia, Department of Economics.
  • Handle: RePEc:uwa:wpaper:18-04
    Note: MD5 = 15a78b2aaeb155cb6aa88c26fb9928cf
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    Cited by:

    1. Rod Tyers & Yixiao Zhou, 2019. "Financial Integration and the Global Effects of China's Growth Surge," Economics Discussion / Working Papers 19-01, The University of Western Australia, Department of Economics.

    More about this item

    Keywords

    Inflation; deflation; productivity; automation; income distribution; tax; transfers; general equilibrium analysis;
    All these keywords.

    JEL classification:

    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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