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Disinflationary Monetary Policy and the Distribution of Income

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  • Willem Thorbeck

    (The Jerome Levy Economics Institute)

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    Abstract

    Inflation over the last 5 years has remained below 3 percent. Many economic observers applaud these results, arguing that inflation has ceased to matter much in the decisions of consumers and businesses. Others such as Martin Feldstein (1996), Lee Hoskins (1991), and Jerry Jordan (1993) advocate further gains on the inflationary front. Feldstein, for instance, argues that reducing the inflation rate to zero would ameliorate the tax distortions caused by inflation, producing substantial gains to the economy. He estimates that to achieve price stability the Federal Reserve would have to engineer a recession that reduces real gross domestic product by 5 percent. Feldstein holds that these costs are far outweighed by the benefits that would occur from reducing the misallocation of resources (in jargon, the deadweight losses) due to inflation. What he overlooks in his analysis is how the costs and benefits of such a policy would be shared. Who would bear the burdens from disinflationary monetary policy? Who would reap the benefits? Would such distributional consequences be desirable in the present economic environment? This working paper attempts to answer these questions first by considering based on economic principles how different sectors would be affected by disinflationary policy. The traditional "money" channel of monetary policy implies that employment in interest-sensitive industries should fall the most. The "credit" channel implies that small, financially-constrained firms should be hurt more than large, financially-stable firms. A slowdown in aggregate activity working through either channel would burden low-income workers more than high-income workers. Since minorities tend to have lower wages than whites, disinflationary policy should disproportionately affect them. Lenders such as bond holders would gain by an unanticipated decrease in inflation.

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    File URL: http://128.118.178.162/eps/mac/papers/9711/9711008.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 9711008.

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    Length: 41 pages
    Date of creation: 20 Nov 1997
    Date of revision:
    Handle: RePEc:wpa:wuwpma:9711008

    Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 41; figures: included
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    Web page: http://128.118.178.162

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Frederic S. Mishkin, 1988. "What Does the Term Structure Tell Us About Future Inflation?," NBER Working Papers 2626, National Bureau of Economic Research, Inc.
    2. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc.
    3. Roland-Holst, D.W. & Sancho, F., 1991. "Ralative Income Determination in the United States: A Social Accounting Perspective," UFAE and IAE Working Papers 188.92, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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    7. W. Lee Hoskins, 1991. "Defending zero inflation: all for naught," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 16-20.
    8. Jerry L. Jordan, 1993. "Credibility begins with a clear commitment to price stability," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
    9. Campbell, John Y & Ammer, John, 1993. " What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Journal of Finance, American Finance Association, vol. 48(1), pages 3-37, March.
    10. Card, David & Lemieux, Thomas, 1994. "Changing Wage Structure and Black-White Wage Differentials," American Economic Review, American Economic Association, vol. 84(2), pages 29-33, May.
    11. W. Lee Hoskins, 1991. "Defending zero inflation: all for naught," Economic Commentary, Federal Reserve Bank of Cleveland, issue Apr.
    12. Fama, Eugene F & French, Kenneth R, 1995. " Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-55, March.
    13. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The Effects of Monetary Policy Shocks: Some Evidence from the Flow of Funds," NBER Working Papers 4699, National Bureau of Economic Research, Inc.
    14. Alan S. Blinder, 1996. "Central banking in a democracy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-14.
    15. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May.
    16. Ben S. Bernanke, 1993. "Credit in the macroeconomy," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 50-70.
    17. Katharine Bradbury, 1996. "Growing inequality of family incomes: changing families and changing wages," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 55-82.
    18. Blinder, Alan S & Esaki, Howard Y, 1978. "Macroeconomic Activity and Income Distribution in the Postwar United States," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 604-09, November.
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