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Disinflation and Inequality in a DSGE monetary model: A Welfare Analysis

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  • Maria Ferrara
  • Patrizio Tirelli

Abstract

We investigate the redistributive e¤ects of a disinflation experiment in an otherwise standard medium-scale DSGE model augmented for Limited Asset Market Participation, implying that a fraction of households do not hold any wealth. We highlight two key mechanisms driving consumption and income distribution: i) the cash in advance constraint on firms working capital needs; ii) the response of profit margins to disinflation, which is crucially dependent on the two most used pricing assumptions in the New-Keynesian literature, i.e. Calvo vs Rotemberg. Results show that disinflation softens the cash in advance constraint and raises the real wage in steady state. This, in turn, lowers inequality. While under the Calvo formalism this e¤ect is reinforced by the fall of price markups, under Rotemberg it is more than compensated by the increase of price markups and, therefore, the opposite result obtains.

Suggested Citation

  • Maria Ferrara & Patrizio Tirelli, 2015. "Disinflation and Inequality in a DSGE monetary model: A Welfare Analysis," Working Papers 305, University of Milano-Bicocca, Department of Economics, revised Jul 2015.
  • Handle: RePEc:mib:wpaper:305
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Disinflation and Inequality in a DSGE monetary model: A Welfare Analysis
      by Christian Zimmermann in NEP-DGE blog on 2015-09-10 00:49:18

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    More about this item

    Keywords

    Disinflation; Inequality; Welfare; LAMP; Monetary Policy; Calvo Price Adjustment; Rotemberg Price Adjustment;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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