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Optimal Redistributive Inflation

Author

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  • Galo Nuño
  • Carlos Thomas

Abstract

We analyze Ramsey-optimal monetary policy under commitment in an economy with uninsurable idiosyncratic risk, long-term nominal bonds and costly inflation. Our model features two transmission channels of monetary policy: a Fisher channel, arising from the impact of inflation on the initial price of long-term bonds, and a liquidity channel. The Fisher channel gives the central bank a reason to inflate for redistributive purposes, because debtors have a higher marginal utility than creditors. This inflationary motive fades over time as bonds mature and the central bank pursues a deflationary path to raise bond prices and thus relax borrowing limits. The result is optimal inflation front-loading. Numerically, we find that optimal policy implies a large consumption and welfare redistribution vis-à-vis a zero inflation policy.

Suggested Citation

  • Galo Nuño & Carlos Thomas, 2022. "Optimal Redistributive Inflation," Annals of Economics and Statistics, GENES, issue 146, pages 3-63.
    • Handle: RePEc:adr:anecst:y:2022:i:146:p:3-63
    DOI: https://doi.org/10.2307/48674138
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    More about this item

    Keywords

    Optimal Monetary Policy; Incomplete Markets; Nominal Debt; Inflation; Redistributive Effects; Continuous Time;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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