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Incomplete markets and the output-inflation tradeoff

  • Yann Algan

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris, UPEM - Université Paris-Est Marne-la-Vallée - Université Paris-Est Marne-la-Vallée (UPEMLV))

  • Edouard Challe

    (CEREG - Centre d'études et de recherches sur l'espace germanophone - Université Paris III - Sorbonne nouvelle)

  • Xavier Ragot

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

This paper analyses the effects of money shocks on macroeconomic aggregates in 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 their 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 attenuating role of mean inflation and money growth persistence on this non-neutrality tradeoff, as well as some of the welfare implications of wealth redistribution, are also examined.

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Paper provided by HAL in its series PSE Working Papers with number halshs-00589134.

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Date of creation: Mar 2008
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Handle: RePEc:hal:psewpa:halshs-00589134
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