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Understanding the distributional impact of long-run inflation

  • Gabriele Camera
  • YiLi Chien

The impact of fully anticipated inflation is systematically studied in heterogeneous agent economies with an endogenous labor supply and portfolio choices. In stationary equilibrium, inflation nonlinearly alters the endogenous distributions of income, wealth, and consumption. Small departures from zero inflation have the strongest impact. Three features determine how inflation impacts distributions and welfare: financial structure, shock persistence, and labor supply elasticity. When agents can self-insure only with money, inflation reduces wealth inequality but may raise consumption inequality. Otherwise, inflation reduces consumption inequality but may raise wealth inequality. Given persistent shocks and an inelastic labor supply, inflation may raise average welfare.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-058.

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Date of creation: 2012
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Handle: RePEc:fip:fedlwp:2012-058
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  1. Scott J. Dressler, 2011. "Money Holdings, Inflation, And Welfare In A Competitive Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(2), pages 407-423, 05.
  2. Jonathan Chiu & Miguel Molico, 2007. "Liquidity, Redistribution, and the Welfare Cost of Inflation," Working Papers 07-39, Bank of Canada.
  3. Boel, Paola & Camera, Gabriele, 2009. "Financial sophistication and the distribution of the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 968-978, October.
  4. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
  5. Akyol, Ahmet, 2004. "Optimal monetary policy in an economy with incomplete markets and idiosyncratic risk," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1245-1269, September.
  6. Alvarez, Fernando & Jermann, Urban J, 2001. "Quantitative Asset Pricing Implications of Endogenous Solvency Constraints," Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1117-51.
  7. Yili Chien & Harold Cole & Hanno Lustig, 2011. "A Multiplier Approach to Understanding the Macro Implications of Household Finance," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 199-234.
  8. Imrohoroglu, Selahattin & Kitao, Sagiri, 2009. "Labor supply elasticity and social security reform," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 867-878, August.
  9. Javier Díaz-Giménez & Andrew Glover & José-Víctor Ríos-Rull, 2011. "Facts on the distributions of earnings, income, and wealth in the United States: 2007 update," Quarterly Review, Federal Reserve Bank of Minneapolis.
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