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The Welfare Cost of Inflation Risk Under Imperfect Insurance

Author

Listed:
  • Olivier Allais

    (Inra)

  • Xavier Ragot

    (Paris School of Economics)

  • Edouard Challe

    (Ecole Polytechnique)

  • Yann Algan

    (Sciences Po)

Abstract

What are the costs of inflation fluctuations and who bears those costs? In this paper, we investigate this question by means of a quantitative incomplete-market, heterogenous-agent model wherein households hold real and nominal assets and are subject to both idiosyncratic labor income shocks and aggregate inflation risk. Inflation risk is found to generates signicant welfare losses for most households, i.e., between 1 and 1.5 percent of permanent consumption. The loss is small or even negative for households at the very top of the productivity and/or wealth distribution. A key feature of our analysis is a nonhomothetic specication for households' preferences towards money and consumption goods. Unlike traditional specications, ours allows the model to reproduce the broad features of the distribution of monetary assets (in addition to being consistent with the distribution of nonmonetary assets).

Suggested Citation

  • Olivier Allais & Xavier Ragot & Edouard Challe & Yann Algan, 2015. "The Welfare Cost of Inflation Risk Under Imperfect Insurance," 2015 Meeting Papers 867, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:867
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    References listed on IDEAS

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    Cited by:

    1. Curran, Michael & Dressler, Scott J., 2020. "Preferences, inflation, and welfare," European Economic Review, Elsevier, vol. 130(C).

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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