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The real effect of inflation in liquidity constrained models


  • Xavier Ragot

    (PJSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)


This article identifies a new channel through which inflation affects the real economy. In a simple monetary model where agents face heterogenous income flows, it is proven that credit constraints create heterogeneity in money demand. Because of this heterogeneity, long run inflation affects the real interest rate and real variables, even when there are no redistributive effects, no distorting fiscal policy, no substitution between leisure and working time, and when prices are flexible. For realistic utility functions, inflation is found to raise the capital stock, but to decrease welfare.

Suggested Citation

  • Xavier Ragot, 2005. "The real effect of inflation in liquidity constrained models," PSE Working Papers halshs-00590556, HAL.
  • Handle: RePEc:hal:psewpa:halshs-00590556
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    References listed on IDEAS

    1. Timothy J. Kehoe & David K. Levine, 2000. "Liquidity Constrained vs. Debt Constrained Markets," Levine's Working Paper Archive 14, David K. Levine.
    2. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
    3. Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, vol. 48(3), pages 565-576, April.
    4. Timothy J. Kehoe & David K. Levine & Michael Woodford, 1990. "The optimum quantity of money revisited," Working Papers 404, Federal Reserve Bank of Minneapolis.
    5. Tullio Jappelli, 1990. "Who is Credit Constrained in the U. S. Economy?," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 219-234.
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    Cited by:

    1. Yann Algan & Xavier Ragot, 2005. "Monetary Policy with Heterogenous Agents and Credit Constraints," Sciences Po publications 2005 - 45, Sciences Po.


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