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Welfare Consequences of Gradual Disinflation in Emerging Economies

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  • ENES SUNEL

Abstract

Emerging economies display considerable inequality in monetary asset holdings, rendering the recent disinflation nontrivial. Using a small open†economy model with uninsurable idiosyncratic risk, this paper shows that a gradual decline of 12% in the quarterly inflation rate leads to an aggregate welfare gain of 0.40% in consumption equivalent terms. The poor gain less than the economy on aggregate, despite holding a more inflation†prone financial portfolio. This is because unequal cash holdings make inflation tax payments of the poor much smaller than those of the rich. When inflation tax revenues finance redistributive transfers that provide insurance, cross†sectional gains become even more dispersed.

Suggested Citation

  • Enes Sunel, 2018. "Welfare Consequences of Gradual Disinflation in Emerging Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(4), pages 705-755, June.
  • Handle: RePEc:wly:jmoncb:v:50:y:2018:i:4:p:705-755
    DOI: 10.1111/jmcb.12478
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