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Demographics, redistribution, and optimal inflation

Author

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  • Bullard, James
  • Garriga, Carlos
  • Waller, Christopher J.

Abstract

The authors study the interaction among population demographics, the desire for intergenerational redistribution of resources in the economy, and the optimal inflation rate in a deterministic life cycle economy with capital. Young cohorts initially have no assets and wages are the main source of income; these cohorts prefer relatively low real interest rates, relatively high wages, and relatively high rates of inflation. Older cohorts work less and prefer higher rates of return from their savings, relatively low wages, and relatively low inflation. In the absence of intergenerational redistribution through lump-sum taxes and transfers, the constrained efficient competitive equilibrium requires optimal distortions on relative prices. The authors’ model allows the social planner to use inflation/deflation to try to achieve the optimal distortions. In the model economy, changes in the population structure are interpreted as the ability of a particular cohort to influence the redistributive policy. When older cohorts have more influence on the redistributive policy, the economy has a relatively low steady-state level of capital and a relatively low steady-state rate of inflation. The opposite happens when young cohorts have more control of policy. These results suggest that aging population structures, such as those in Japan, may contribute to observed low rates of inflation or even deflation.

Suggested Citation

  • Bullard, James & Garriga, Carlos & Waller, Christopher J., 2012. "Demographics, redistribution, and optimal inflation," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 419-440.
  • Handle: RePEc:fip:fedlrv:y:2012:i:november:p:419-440:n:v.94no.6
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    References listed on IDEAS

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    1. Carlos Garriga & Fernando Sánchez-Losada, 2009. "Estate taxation with warm-glow altruism," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 8(2), pages 99-118, August.
    2. William G. Gale & John Karl Scholz, 1994. "Intergenerational Transfers and the Accumulation of Wealth," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 145-160, Fall.
    3. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    4. Dávila, Julio, 2012. "The taxation of capital returns in overlapping generations models," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 441-453.
    5. Carlos Garriga-Calvet, 2000. "Optimal Fiscal Policy in Overlapping Generations Models," Econometric Society World Congress 2000 Contributed Papers 1772, Econometric Society.
    6. Bullard, James & Waller, Christopher J, 2004. "Central Bank Design in General Equilibrium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 95-113, February.
    7. William J. Baumol & Charles A. Wilson (ed.), 2001. "Welfare Economics," Books, Edward Elgar Publishing, volume 0, number 529, April.
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    Cited by:

    1. repec:prg:jnlpol:v:2017:y:2017:i:3:id:1148:p:351-369 is not listed on IDEAS
    2. Igor Fedotenkov, 2016. "Population ageing and inflation with endogenous money creation," Bank of Lithuania Working Paper Series 23, Bank of Lithuania.
    3. Hideki Konishi & Kozo Ueda, 2013. "Aging and Deflation from a Fiscal Perspective," IMES Discussion Paper Series 13-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
    4. Kitov, Ivan & KItov, Oleg, 2013. "Inflation, unemployment, and labor force. Phillips curves and long-term projections for Japan," MPRA Paper 49388, University Library of Munich, Germany.
    5. Charan Singh, 2015. "Inflation targeting in India," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 8(1-2), pages 17-24, July.
    6. Derek Anderson & Dennis P Botman & Benjamin L Hunt, 2014. "Is Japan’s Population Aging Deflationary?," IMF Working Papers 14/139, International Monetary Fund.
    7. Jong-Won Yoon & Jinill Kim & Jungjin Lee, 2014. "Impact of Demographic Changes on Inflation and the Macroeconomy," IMF Working Papers 14/210, International Monetary Fund.

    More about this item

    Keywords

    Demography; Inflation (Finance);

    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
    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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