Work

Inflation as a Redistribution Shock: Effects on Aggregates and Welfare

Year: 2006

Type: report

Abstract: Episodes of unanticipated inflation reduce the real value of nominal claims and thus redistribute wealth from lenders to borrowers.In this study, we consider redistribution as a channel for aggregate and welfare effects of inflation.We model an inflation episode as an unanticipated shock to the wealth distribution in a quantitative overlapping-generations model of the U.S. economy.While the redistribution shock is zero sum, households react asymmetrically, mostly because borrowers are younger on average than lenders.As a result, inflation generates a decrease in labor supply as well as an increase in savings.Even though inflation-induced redistribution has a persistent negative effect on output, it improves the weighted welfare of domestic households.

Source: National Bureau of Economic Research

DOI: 10.3386/w12319

Authors: Matthias Doepke, Martin Schneider

Institutions: National Bureau of Economic Research, Federal Reserve Bank of Minneapolis, University of California, Los Angeles

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: No poverty, Decent work and economic growth

Open Access status: green

Funders: National Science Foundation, Alfred P. Sloan Foundation