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Distributional and Welfare Consequences of Disinflation in Emerging Economies

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  • Enes Sunel

Abstract

This study investigates the distributional and welfare consequences of disinflation in emerging economies using a monetary model of a small open economy with uninsured idiosyncratic earnings risk. The model is calibrated to Turkish data and is used to compare stationary equilibria with quarterly inflation rates of 14.25% (for 1987 : Q1-2002 : Q4) and 2.25% (for 2003 : Q1- 2010 : Q2). Reduction in inflationary finance is assumed to affect lump-sum transfers, since government spending-to-GDP ratios have been roughly stable during disinflation in a number of emerging economies. Disinflation is found to lower aggregate welfare by 1.23% in terms of compensating consumption variation. This is because the reduction in the distortionary impediments of inflation on the poor falls short of the decline in their redistributive transfers income that is mainly financed by the rich. The shrinkage of cash transfers also tightens natural debt limits and increases the precautionary savings motive.

Suggested Citation

  • Enes Sunel, 2013. "Distributional and Welfare Consequences of Disinflation in Emerging Economies," Working Papers 1334, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  • Handle: RePEc:tcb:wpaper:1334
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    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2013/13-34
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    Cited by:

    1. Enes Sunel, 2018. "Welfare Consequences of Gradual Disinflation in Emerging Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(4), pages 705-755, June.
    2. Mimir Yasin & Sunel Enes & Taşkın Temel, 2013. "Required reserves as a credit policy tool," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-58, June.

    More about this item

    Keywords

    Small open economy; incomplete markets; disinflation;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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