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Inflation and Risk in Household Investment Decisions

Author

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  • Horacio Nicolás Tanzi

    (University of Buenos Aires, Argentina)

Abstract

This study quantifies the steady-state effects of inflation on risk in household investment decisions. In a small open economy, using a New Keynesian heterogeneous agent model (HANK), a risky asset—capital—and a risk-free asset—bonds—are introduced. The return on capital is modeled through a variant of Calvo pricing, linking capital risk to inflation. The results indicate that incorporating the effect of inflation on capital risk leads to a reallocation of household portfolios, decreasing the stock of capital and increasing the stock of safe assets. This reallocation implies a reduction in steady state output.

Suggested Citation

  • Horacio Nicolás Tanzi, 2025. "Inflation and Risk in Household Investment Decisions," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(85), pages 92-127, May.
    • Handle: RePEc:bcr:ensayo:v:1:y:2025:i:85:p:92-127
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    File URL: https://investigacionesconomicas.bcra.gob.ar/ensayos_economicos_bcra/article/view/680/572
    File Function: Spanish version (versión en Español)
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    More about this item

    Keywords

    heterogeneous agents; household portfolio composition; inflation; investment; price stickiness; risk;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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