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Demographics, Redistribution, and Optimal Inflation

Author

Listed:
  • James Bullard

    (President and Chief Executive Officer, Federal Reserve Bank of St. Louis)

  • Carlos Garriga

    (Research Officer, Federal Reserve Bank of St. Louis)

  • Christopher J. Waller

    (Senior Vice President and Director of Research, Federal Reserve Bank of St. Louis (E-mail: cwaller@stls.frb.org))

Abstract

We study the interaction between population demographics, the desire for redistribution in the economy, and the optimal inflation rate in a deterministic economy with capital. The intergenerational redistribution tension is intrinsic in the general equilibrium life-cycle models we use. Young cohorts do not initially have any assets and wages are the main source of income; they prefer relatively low real interest rates, relatively high wages, and relatively high rates of inflation. Older generations work less and prefer higher rates of return from their savings, relatively low wages, and relatively low inflation. In the absence of intergenerational redistribution via lump-sum taxes and transfers, the constrained efficient competitive equilibrium entails optimal distortions on relative prices. We allow the planner to use inflation to try to achieve the optimal distortions. In the economy changes in the population structure are interpreted as the ability of a particular cohort to influence the redistributive policy. When the old have more influence on the redistributive policy, the economy has a relatively low steady state level of capital and a relatively low steady state rate of inflation. The opposite happens as young cohorts have more control of policy. These results suggest that aging population structures like those in Japan may contribute to observed low rates of inflation or even deflation.

Suggested Citation

  • James Bullard & Carlos Garriga & Christopher J. Waller, 2012. "Demographics, Redistribution, and Optimal Inflation," IMES Discussion Paper Series 12-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:12-e-13
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    File URL: http://www.imes.boj.or.jp/research/papers/english/12-E-13.pdf
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    References listed on IDEAS

    as
    1. Carlos Garriga & Fernando Sánchez-Losada, 2009. "Estate taxation with warm-glow altruism," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 8(2), pages 99-118, August.
    2. William G. Gale & John Karl Scholz, 1994. "Intergenerational Transfers and the Accumulation of Wealth," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 145-160, Fall.
    3. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    4. Dávila, Julio, 2012. "The taxation of capital returns in overlapping generations models," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 441-453.
    5. Carlos Garriga-Calvet, 2000. "Optimal Fiscal Policy in Overlapping Generations Models," Econometric Society World Congress 2000 Contributed Papers 1772, Econometric Society.
    6. Bullard, James & Waller, Christopher J, 2004. "Central Bank Design in General Equilibrium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 95-113, February.
    7. William J. Baumol & Charles A. Wilson (ed.), 2001. "Welfare Economics," Books, Edward Elgar Publishing, volume 0, number 529, April.
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    Cited by:

    1. Kitov, Ivan & KItov, Oleg, 2013. "Inflation, unemployment, and labor force. Phillips curves and long-term projections for Japan," MPRA Paper 49388, University Library of Munich, Germany.
    2. Jong-Won Yoon & Jinill Kim & Jungjin Lee, 2014. "Impact of Demographic Changes on Inflation and the Macroeconomy," IMF Working Papers 14/210, International Monetary Fund.
    3. Hideki Konishi & Kozo Ueda, 2013. "Aging and Deflation from a Fiscal Perspective," IMES Discussion Paper Series 13-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
    4. Igor Fedotenkov, 2016. "Population ageing and inflation with endogenous money creation," Bank of Lithuania Working Paper Series 23, Bank of Lithuania.
    5. Charan Singh, 2015. "Inflation targeting in India," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 8(1-2), pages 17-24, July.
    6. Derek Anderson & Dennis P Botman & Benjamin L Hunt, 2014. "Is Japan’s Population Aging Deflationary?," IMF Working Papers 14/139, International Monetary Fund.
    7. repec:prg:jnlpol:v:2017:y:2017:i:3:id:1148:p:351-369 is not listed on IDEAS

    More about this item

    Keywords

    monetary policy; inflation bias; deflation; central bank design;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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