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DISINFLATION, INEQUALITY, AND WELFARE IN A TANK MODEL
Author(s) -
Tirelli Patrizio,
Ferrara Maria
Publication year - 2020
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12870
Subject(s) - disinflation , economics , welfare , asset (computer security) , endogeneity , dividend , consumption (sociology) , monetary economics , inequality , constraint (computer aided design) , macroeconomics , labour economics , monetary policy , econometrics , finance , market economy , mathematical analysis , social science , computer security , mathematics , sociology , computer science , mechanical engineering , engineering
We investigate the redistributive and welfare effects of disinflation in a two‐agent New Keynesian model characterized by limited asset market participation and wealth inequality. We highlight two key mechanisms driving our long‐run results: (1) the cash in advance constraint on firms working capital; (2) dividends endogeneity. These two channels point in opposite directions. Lower inflation softens the cash in advance constraint and, by raising labor demand, lowers inequality. But disinflation also raises dividends and this increases inequality. The disinflation is always welfare‐improving for asset holders. We obtain ambiguous results for non‐asset holders, who suffer substantial consumption losses during the transition. ( JEL E31, E5, D3, D6)