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Inflationary Redistribution, Trading Opportunities and Consumption Inequality

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  • Timothy Kam
  • Junsang Lee

Abstract

We study competitive search in goods markets in a heterogeneous-agent monetary model. The model accounts for three stylized facts connecting inflation to consumption inequality, to price dispersion, and to the speed of monetary payments. With competitive search, individuals’ endogenous probabilities on trading events give rise to a trading-opportunity (extensive-margin) force that works in opposite direction to well-known redistributive (intensive-margin) effect of inflation. This implies a new trade-off in response to long-run inflation targets. Welfare falls but liquid-wealth inequality falls and then rises with inflation as an extensive margin of trade dominates the redistributive intensive margin, when inflation is sufficiently high.

Suggested Citation

  • Timothy Kam & Junsang Lee, 2022. "Inflationary Redistribution, Trading Opportunities and Consumption Inequality," ANU Working Papers in Economics and Econometrics 2022-685, Australian National University, College of Business and Economics, School of Economics.
    • Handle: RePEc:acb:cbeeco:2022-685
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    File URL: https://cbe.anu.edu.au/researchpapers/econ/wp685.pdf
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    Keywords

    Competitive Search; Inflation; Policy Trade-offs; Redistribution; Computational Geometry;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • 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
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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