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Who Pays for Disinflation? Disinflationary Monetary Policy and the Distribution of Income

  • Willem Thorbecke

Using theoretical predictions, econometric results, and the example of the Volcker disinflation, Thorbecke establishes that through disinflation's burden on the durable goods and construction industries, small firms, and low-wage workers and its benefits to bond market investors, it effects a redistribution of wealth from the poor to the rich. Because of this distributional consequence, he argues, engineering a disinflationary recession now to wring more inflation out of the economy would be inappropriate. On the contrary, with inflation as low as it is and with upward pressure on wages that could trigger a rise in inflation also low, now is the time for the Federal Reserve to let the economy grow--to seek policies that promote distributive justice and that help those individuals most at risk for shrinking income.

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Paper provided by Levy Economics Institute in its series Economics Public Policy Brief Archive with number ppb_38.

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Handle: RePEc:lev:levppb:ppb_38
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  1. Roland-Holst, D.W. & Sancho, F., 1991. "Ralative Income Determination in the United States: A Social Accounting Perspective," UFAE and IAE Working Papers 188.92, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  2. Gertler, M. & Gilchrist, S., 1993. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 93-02, C.V. Starr Center for Applied Economics, New York University.
  3. Willem Thorbecke, 1997. "Disinflationary Monetary Policy and the Distribution of Income," Economics Working Paper Archive wp_185, Levy Economics Institute.
  4. Thorbecke, Willem, 2000. "Monetary Policy, Time-Varying Risk, and the Bond Market Debacle of 1994," Journal of Macroeconomics, Elsevier, vol. 22(1), pages 159-174, January.
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