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The redistributive effects of inflation and the shape of money demand

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  • Boel, Paola

Abstract

I quantify the distributional effects of expected inflation in a sample of OECD countries using a microfounded model of money where agents differ in their consumption risk, against which they can insure using money and government bonds. The model is calibrated using harmonized wealth microdata from the Luxembourg Wealth Study. I find that the inflation tax is progressive for low inflation levels, but it becomes regressive as inflation increases. Cut-off points vary across countries and depend on discount factors and heterogeneity in consumption risk across agents. Moreover, I find that the magnitude of inflation’s distributional impact depends not only on wealth distribution but also, and importantly, on the curvature and height of the money demand curve. Indeed, a higher and less elastic money demand leads to more regressive effects of inflation, thus implying such effects are not necessarily stronger in a country with a more unequal wealth distribution.

Suggested Citation

  • Boel, Paola, 2018. "The redistributive effects of inflation and the shape of money demand," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 208-219.
  • Handle: RePEc:eee:dyncon:v:90:y:2018:i:c:p:208-219
    DOI: 10.1016/j.jedc.2018.02.011
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    2. Mehdi el Herradi & Jakob de Haan & Aurélien Leroy, 2020. "Inflation and the Income Share of the Rich: Evidence for 12 OECD Countries," CESifo Working Paper Series 8203, CESifo.
    3. Mehdi El Herradi & Jakob de Haan & Aurelien Leroy, 2021. "Inflation and the Income Share of the Rich: Evidence for 14 OECD Countries," Working Papers 570, ECINEQ, Society for the Study of Economic Inequality.

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    More about this item

    Keywords

    Money; Heterogeneity; Calibration; Welfare cost of inflation;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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