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Permanent Income Shocks and Inflation

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  • Balazs Zelity

    (Department of Economics, Wesleyan University)

Abstract

A puzzle in the literature on the macroeconomic effects of permanent income shocks is that exogenous permanent Social Security shocks do not have a sustained positive effect on real aggregate consumption. It has been argued that this is due to the implementation of contractionary monetary policy in wake of these benefit increases. This paper documents an alternative, potentially complementary explanation for the puzzle. Namely, using exogenous permanent Social Security shocks as well as minimum wage increases, I show that these permanent income shocks lead to an increase in inflation. Thus while nominal aggregate consumption gains can be observed in the data, real gains are small to non-existent due to the higher price level.

Suggested Citation

  • Balazs Zelity, 2020. "Permanent Income Shocks and Inflation," Wesleyan Economics Working Papers 2020-003, Wesleyan University, Department of Economics.
    • Handle: RePEc:wes:weswpa:2020-003
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    File URL: http://repec.wesleyan.edu/pdf/bzelity/2020003_zelity.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    permanent income shocks; Social Security; minimum wage; inflation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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