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Nominal Maturity Mismatch and the Liquidity Cost of Inflation

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Abstract

We document a liquidity channel through which unexpected inflation generates substantial welfare losses. Households hold nominal liabilities with longer duration than their nominal assets. Due to this mismatch, losses from unexpected inflation concentrate over short horizons while gains accumulate over the long run, harming liquidity-constrained households who cannot borrow against future gains. The 2021–2022 inflation shock caused welfare losses valued at 1.1% of lifetime wealth for the lower half of the wealth distribution—equivalent in dollar terms to 47% of annual consumption. More than three-quarters of this loss comes from our liquidity channel rather than the traditional wealth channel.

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  • Yu-Ting Chiang & Ezra Karger, 2024. "Nominal Maturity Mismatch and the Liquidity Cost of Inflation," Working Papers 2024-031, Federal Reserve Bank of St. Louis, revised 09 Dec 2025.
    • Handle: RePEc:fip:fedlwp:98882
    DOI: 10.20955/wp.2024.031
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    Cited by:

    1. Yu-Ting Chiang & Ezra Karger & Jesse LaBelle, 2024. "Treasury Debt and Inflation Tax," Review, Federal Reserve Bank of St. Louis, vol. 106(9), pages 1-11, October.

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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G5 - Financial Economics - - Household Finance

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