Financial Sophistication and the Distribution of the Welfare Cost of Inflation

35 Pages Posted: 23 Dec 2014

See all articles by Paola Boel

Paola Boel

Sveriges Riksbank - Research Division

Gabriele Camera

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

Date Written: December 22, 2014

Abstract

The welfare cost of anticipated inflation is quantified in a calibrated model of the U.S. economy that exhibits tractable equilibrium dispersion in wealth and earnings. Inflation does not generate large losses in societal welfare, yet its impact varies noticeably across segments of society depending also on the financial sophistication of the economy. If money is the only asset, then inflation hurts mostly the wealthier and more productive agents, while those poorer and less productive may even benefit from inflation. The converse holds in a more sophisticated financial environment where agents can insure against consumption risk with assets other than money.

Keywords: Money, Heterogeneity, Friedman rule, Trade frictions, Calibration

JEL Classification: E4, E5

Suggested Citation

Boel, Paola and Camera, Gabriele, Financial Sophistication and the Distribution of the Welfare Cost of Inflation (December 22, 2014). Available at SSRN: https://ssrn.com/abstract=2541995 or http://dx.doi.org/10.2139/ssrn.2541995

Paola Boel

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

Gabriele Camera (Contact Author)

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

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