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On the distributive effects of inflation

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  • Gottlieb, Charles

Abstract

This paper undertakes a quantitative investigation of the effects of anticipated inflation on the distribution of household wealth and welfare. Consumer Finance Data on household financial wealth suggests that about a third of the US population holds all its financial assets in transaction accounts. The remaining two-third of the US population holds most of their financial assets outside transaction accounts. To account for this evidence, I introduce a portfolio choice in a standard incomplete markets model with heterogeneous agents. I calibrate the model economy to SCF 2010 US data and use this environment to study the distributive effects of changes in anticipated inflation. An increase in anticipated inflation leads households to reshuffle their portfolio towards real assets. This crowding-in of supply for real assets lowers equilibrium interest rates and thereby redistributes wealth from creditors to borrowers. Because borrowers have a higher marginal utility, this redistribution improves aggregate welfare. First, this paper shows that inflation acts not only a regressive consumption tax as in Erosa and Ventura (2002), but also as a progressive tax. Second, this paper shows that the welfare cost of inflation are even lower than the estimates computed by Lucas (2000) and Ireland (2009). Finally, this paper offers insights into why deflationary environments should be avoided.

Suggested Citation

  • Gottlieb, Charles, 2015. "On the distributive effects of inflation," SAFE Working Paper Series 116, Leibniz Institute for Financial Research SAFE.
  • Handle: RePEc:zbw:safewp:116
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    References listed on IDEAS

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    1. Annette Vissing-Jorgensen, 2000. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," Econometric Society World Congress 2000 Contributed Papers 1102, Econometric Society.
    2. Julio Dávila & Jay H. Hong & Per Krusell & José‐Víctor Ríos‐Rull, 2012. "Constrained Efficiency in the Neoclassical Growth Model With Uninsurable Idiosyncratic Shocks," Econometrica, Econometric Society, vol. 80(6), pages 2431-2467, November.
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    4. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
    5. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
    6. Casey B. Mulligan & Xavier Sala-i-Martin, 1995. "Adoption of financial technologies: Implications for money demand and monetary policy," Economics Working Papers 134, Department of Economics and Business, Universitat Pompeu Fabra.
    7. Javier Diaz-Gimenez & Andrew Glover & Jose-Victor Rios-Rull, 2011. "Facts on the distributions of earnings, income, and wealth in the United States: 2007 update," Quarterly Review, Federal Reserve Bank of Minneapolis.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. On the distributive effects of inflation
      by Christian Zimmermann in NEP-DGE blog on 2015-10-29 05:31:32

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    Cited by:

    1. Mehdi el Herradi & Jakob de Haan & Aurélien Leroy, 2020. "Inflation and the Income Share of the Rich: Evidence for 12 OECD Countries," CESifo Working Paper Series 8203, CESifo.
    2. Godfrey Akileng & Abbot Anthony Ogwang & Charles Ssendyona, 2018. "Determinants of performance of securities exchanges in East Africa," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 7(3), pages 1-3.
    3. James B. Bullard, 2014. "Income inequality and monetary policy: a framework with answers to three questions," Speech 235, Federal Reserve Bank of St. Louis.
    4. Florin Bilbiie & Xavier Ragot, . "Optimal Monetary Policy and Liquidity with Heterogeneous Households," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    5. Mehdi El Herradi & Jakob de Haan & Aurelien Leroy, 2021. "Inflation and the Income Share of the Rich: Evidence for 14 OECD Countries," Working Papers 570, ECINEQ, Society for the Study of Economic Inequality.

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    More about this item

    Keywords

    Anticipated Inflation; Monetary Policy; Incomplete markets; Heterogeneous agents; Endogenous Asset Market Participation;
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