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The real effect of inflation in liquidity constrained models

  • 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 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.

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Paper provided by HAL in its series PSE Working Papers with number halshs-00590556.

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Date of creation: Dec 2005
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Handle: RePEc:hal:psewpa:halshs-00590556
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00590556
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  1. Timothy J. Kehoe & David K. Levine & Michael Woodford, 1992. "The Optimum Quantity of Money Revisited," Levine's Working Paper Archive 2035, David K. Levine.
  2. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
  3. 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.
  4. Timothy J. Kehoe & David K. Levine, 2000. "Liquidity Constrained vs. Debt Constrained Markets," Levine's Working Paper Archive 14, David K. Levine.
  5. Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, vol. 48(3), pages 565-76, April.
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