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Understanding the Distributional Impact of Long‐Run Inflation
Author(s) -
CAMERA GABRIELE,
CHIEN YILI
Publication year - 2014
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12136
Subject(s) - economics , consumption (sociology) , inflation (cosmology) , shock (circulatory) , monetary economics , welfare , portfolio , inequality , real interest rate , general equilibrium theory , macroeconomics , monetary policy , labour economics , financial economics , medicine , market economy , mathematical analysis , social science , physics , mathematics , sociology , theoretical physics
The impact of fully anticipated inflation is systematically studied in heterogeneous agent economies with an endogenous labor supply and portfolio choices. In stationary equilibrium, inflation nonlinearly alters the endogenous distributions of income, wealth, and consumption. Small departures from zero inflation have the strongest impact. Three features determine how inflation impacts distributions and welfare: financial structure, shock persistence, and labor supply elasticity. When agents can self‐insure only with money, inflation reduces wealth inequality but may raise consumption inequality. Otherwise, inflation reduces consumption inequality but may raise wealth inequality. Given persistent shocks and an inelastic labor supply, inflation may raise average welfare. The results hold when the model is extended to account for capital formation.