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Incomplete markets and the output-inflation tradeoff

Author

Listed:
  • Yann Algan

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Edouard Challe

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Xavier Ragot

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper analyses the effects of money shocks on macroeconomic aggregates in a tractable flexible-price, incomplete-markets environment that generates persistent wealth inequalities amongst agents. In this framework, current inflation 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. If the shocks are persistent, however, they also raise inflation expectations and thus deter the employed from saving and supplying labour. We relate the strength of these two inflation taxes to the underlying parameters of the model and study how they compete in determining the overall sign and slope of the implied ‘output–inflation tradeoff' relation.

Suggested Citation

  • Yann Algan & Edouard Challe & Xavier Ragot, 2011. "Incomplete markets and the output-inflation tradeoff," SciencePo Working papers Main hal-01169657, HAL.
    • Handle: RePEc:hal:spmain:hal-01169657
    DOI: 10.1007/s00199-009-0499-0
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01169657
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    References listed on IDEAS

    as
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    Cited by:

    1. Olivier Allais & Yann Algan & Edouard Challe & Xavier Ragot, 2020. "The Welfare Cost of Inflation Risk under Imperfect Insurance," Annals of Economics and Statistics, GENES, issue 138, pages 1-20.
    2. Guillaume Rocheteau & Pierre-Olivier Weill & Tsz-Nga Wong, 2015. "Working through the Distribution: Money in the Short and Long Run," NBER Working Papers 21779, National Bureau of Economic Research, Inc.
    3. Rocheteau, Guillaume & Weill, Pierre-Olivier & Wong, Tsz-Nga, 2021. "An heterogeneous-agent New-Monetarist model with an application to unemployment," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 64-90.
    4. Edouard Challe & Xavier Ragot, 2010. "Aggregate Consumption in Times of Crisis: The Role of Financial Frictions -super-1," CESifo Economic Studies, CESifo Group, vol. 56(4), pages 627-648, December.
    5. François Grand & Xavier Ragot, 2016. "Incomplete markets and derivative assets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(3), pages 517-545, August.
    6. Francesco Lippi & Stefania Ragni & Nicholas Trachter, 2013. "State Dependent Monetary Policy," EIEF Working Papers Series 1324, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2013.
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    9. Boel, Paola, 2018. "The redistributive effects of inflation and the shape of money demand," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 208-219.
    10. Jing Wan & Shenghao Zhu, 2019. "Bequests, estate taxes, and wealth distributions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(1), pages 179-210, February.
    11. Lippi, Francesco & Ragni, Stefania & Trachter, Nicholas, 2015. "Optimal monetary policy with heterogeneous money holdings," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 339-368.
    12. Takashi Kamihigashi, 2014. "Elementary results on solutions to the bellman equation of dynamic programming: existence, uniqueness, and convergence," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(2), pages 251-273, June.
    13. Takashi Kamihigashi, 2014. "An order-theoretic approach to dynamic programming: an exposition," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 2(1), pages 13-21, April.
    14. Shenghao Zhu, 2019. "A Becker–Tomes model with investment risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(4), pages 951-981, June.

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    More about this item

    Keywords

    Incomplete Markets; Borrowing Constraints; Short-Run Non-Neutrality;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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