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Incomplete Markets and the Output-inflation Tradeoff

  • Yann Algan

    (Ecole d'Économie de Paris - Paris School of Economics (EEP-PSE))

  • Edouard Challe

    (Université Paris-Dauphine - Paris IX)

  • Xavier Ragot

    (Banque de France)

This paper analyses the effects of money shocks on macroeconomic aggregates in a flexible-price, incomplete-markets environment that generates persistent wealth inequalities amongst agents. In this framework, unexpected money shocks redistribute wealth from the cash-rich employed to the cash-poor unemployed, and induce the former to increase their labour supply in order to maintain their desired levels of consumption and precautionary savings. The reduced-form dynamics of the model is a textbook "output-inflation tradeoff" equation whereby inflation shocks raise current output. The attenuating role of mean inflation and money growth persistence on this non-neutrality tradeoff, as well as some of the welfare implications of wealth redistribution, are also examined.

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Paper provided by Sciences Po in its series Sciences Po publications with number 2006 - 45.

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Date of creation: Mar 2008
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Handle: RePEc:spo:wpmain:info:hdl:2441/8881
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  9. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
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