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Intergenerational Transmission of Inflation Aversion: Theory and Evidence

  • Farvaque, Etienne

    (Université de Lille 1)

  • Mihailov, Alexander

    (University of Reading)

This paper studies the transmission of preferences in an overlapping-generations model with heterogeneous mature agents characterized by different degrees of inflation aversion. We show how the dynamics of a society's degree of inflation aversion and the implied degree of central bank independence depend on the direction and speed of changes in the structure of the population's preferences, themselves a function of parent socialization efforts in response to observed inflation. We then construct a survey-based measure of inflation aversion and provide empirical support for our analytical and simulation results. Available cross-section evidence confirms that a nation's demographic structure, in particular variation in the share of retirees as a proxy for the more inflation-averse type, is a key determinant of inflation aversion, together with experience with past inflation and the resulting collective memory embodied in monetary institutions.

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Paper provided by IRISS at CEPS/INSTEAD in its series IRISS Working Paper Series with number 2009-11.

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Length: 36 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:irs:iriswp:2009-11
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  1. María Sáez-Martí & Anna Sjögren, 2008. "Peers and Culture," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 73-92, 03.
  2. Bisin, A. & Verdier, T., 1999. "A Model of Cultural Transmission, Voting and Political Ideology," Papers 1999-13, Laval - Laboratoire Econometrie.
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  4. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
  5. Krause, Stefan & Méndez, Fabio, 2008. "Institutions, arrangements and preferences for inflation stability: Evidence and lessons from a panel data analysis," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 282-307, March.
  6. Hayo, Bernd, 1998. "Inflation culture, central bank independence and price stability," European Journal of Political Economy, Elsevier, vol. 14(2), pages 241-263, May.
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  8. Stefan Krause & Fabio Mendez, 2003. "Policy Makers' Preferences, Party Ideology, and the Political Business Cycle," Emory Economics 0319, Department of Economics, Emory University (Atlanta).
  9. Daniels, Joseph P. & VanHoose, David D., 2006. "Openness, the sacrifice ratio, and inflation: Is there a puzzle?," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1336-1347, December.
  10. Scheve, Kenneth, 2004. "Public Inflation Aversion and the Political Economy of Macroeconomic Policymaking," International Organization, Cambridge University Press, vol. 58(01), pages 1-34, February.
  11. Edward Nelson, 2006. "Ireland and Switzerland: the jagged edges of the Great Inflation," Working Papers 2006-016, Federal Reserve Bank of St. Louis.
  12. Luca Antonio Ricci & Pierpaolo Benigno, 2009. "The Inflation-Unemployment Trade-Off At Low Inflation," IMF Working Papers 09/34, International Monetary Fund.
  13. Bisin, Alberto & Verdier, Thierry, 2001. "The Economics of Cultural Transmission and the Dynamics of Preferences," Journal of Economic Theory, Elsevier, vol. 97(2), pages 298-319, April.
  14. Berentsen, Aleksander & Strub, Carlo, 2009. "Central bank design with heterogeneous agents," European Economic Review, Elsevier, vol. 53(2), pages 139-152, February.
  15. Brumm, Harold J., 2002. "Inflation and Central Bank independence revisited," Economics Letters, Elsevier, vol. 77(2), pages 205-209, October.
  16. Okina, Kunio & Shirakawa, Masaaki & Shiratsuka, Shigenori, 2001. "The Asset Price Bubble and Monetary Policy: Japan's Experience in the Late 1980s and the Lessons: Background Paper," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 395-450, February.
  17. Jayadev, Arjun, 2006. "Differing preferences between anti-inflation and anti-unemployment policy among the rich and the poor," Economics Letters, Elsevier, vol. 91(1), pages 67-71, April.
  18. Jon Faust, 1992. "Whom can we trust to run the Fed? Theoretical support for the founders' views," International Finance Discussion Papers 429, Board of Governors of the Federal Reserve System (U.S.).
  19. Christopher Crowe & Ellen E. Meade, 2007. "The Evolution of Central Bank Governance around the World," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 69-90, Fall.
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