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Incomplete markets and the output–inflation tradeoff

  • Yann Algan

    ()

  • Edouard Challe

    ()

  • Xavier Ragot

    ()

This paper analyses the e¤ects of money shocks on macroeconomic aggregates within a flexible price, incomplete markets environment that generates persistent wealth inequalities amongst agents. In this framework, unexpected money shocks redistribute wealth from the cash-rich employed to the cash-poor unemployed and induce the former to increase labour supply in order to maintain their desired levels of consumption and precautionary savings. The reduced-form dynamics of the model is a textbook output-inflation tradeoff equation, whereby inflation shocks raise current output. The limiting impact of mean inflation and money growth persistence on this non neutrality mechanism are also examined.

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File URL: http://hdl.handle.net/10.1007/s00199-009-0499-0
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Article provided by Springer in its journal Economic Theory.

Volume (Year): 46 (2011)
Issue (Month): 1 (January)
Pages: 55-84

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Handle: RePEc:spr:joecth:v:46:y:2011:i:1:p:55-84
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  2. Aleksander Berentsen & Gabriele Camera & C hristopher W aller, 2005. "The Distribution Of Money Balances And The Nonneutrality Of Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 465-487, 05.
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  7. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
  8. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  9. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
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  12. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
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  15. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, vol. 54(1), pages 148-164, June.
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