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Optimal Inflation to Reduce Inequality

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  • Lorenzo, Menna
  • Patrizio, Tirelli

Abstract

A popular argument in favour of price stability is that the inflation-tax burden would disproportionately fall on the poor because wealth is unevenly distributed and portfolio composition of poorer households is skewed towards a larger share of money holdings. We reconsider the issue in a DSGE model characterized by limited participation to the market for interest bearing assets (LAMP). We show that a combination of higher in ation and lower income taxes reduces inequality. When we calibrate the share of constrained agents to fit the wealth Gini index for the US, the optimal inflation rate is above 4%. This result is robust to alternative foundations of money demand equations.

Suggested Citation

  • Lorenzo, Menna & Patrizio, Tirelli, 2016. "Optimal Inflation to Reduce Inequality," Working Papers 353, University of Milano-Bicocca, Department of Economics, revised 01 Nov 2016.
  • Handle: RePEc:mib:wpaper:353
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    References listed on IDEAS

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    1. repec:spr:qualqt:v:52:y:2018:i:5:d:10.1007_s11135-017-0676-3 is not listed on IDEAS
    2. Mehmet Balcilar & Shinhye Chang & Rangan Gupta & Stephen M. Miller, 2018. "The relationship between the inflation rate and inequality across U.S. states: a semiparametric approach," Quality & Quantity: International Journal of Methodology, Springer, vol. 52(5), pages 2413-2425, September.
    3. Andrea Colciago & Anna Samarina & Jakob de Haan, 2018. "Central bank policies and income and wealth inequality: A survey," DNB Working Papers 594, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    in ation; monetary and fiscal policy; Ramsey plan; inequality;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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