Understanding the Distributional Impact of Long-Run Inflation
FRB of St. Louis Working Paper No. 2012-058B
44 Pages Posted: 29 Nov 2012 Last revised: 25 May 2013
Date Written: April 26, 2013
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.
Keywords: Money, Heterogeneity, Wealth Inequality, Consumption Inequality
JEL Classification: E4, E5
Suggested Citation: Suggested Citation