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

See all articles by Gabriele Camera

Gabriele Camera

Chapman University - Economic Science Institute; University of Bologna - Dept. of Economics

YiLi Chien

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: April 26, 2013

Abstract

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

Camera, Gabriele and Chien, YiLi, Understanding the Distributional Impact of Long-Run Inflation (April 26, 2013). FRB of St. Louis Working Paper No. 2012-058B. Available at SSRN: https://ssrn.com/abstract=2182136 or http://dx.doi.org/10.2139/ssrn.2182136

Gabriele Camera

Chapman University - Economic Science Institute ( email )

Orange, CA 92866
United States

HOME PAGE: http://www1.chapman.edu/~camera/

University of Bologna - Dept. of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

YiLi Chien (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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