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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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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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  1. Doepke, Matthias & Schneider, Martin, 2006. "Aggregate Implications of Wealth Redistribution: The Case of Inflation," CEPR Discussion Papers 5552, C.E.P.R. Discussion Papers.
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