Role of Cash and Costs of Inflation for Different Income Groups in the U.S.

34 Pages Posted: 22 Mar 2018 Last revised: 26 Nov 2018

See all articles by Venoo Kakar

Venoo Kakar

San Francisco State University

Gerald Daniels

Howard University

Date Written: November 20, 2018

Abstract

Due to the adverse effects of the Great Recession, economic inequality has received much attention in the macroeconomic literature. While U.S. monetary policy set by the Federal Reserve does not seek to directly influence economic inequality by operating under the dual mandate, it has indirect consequences on economic inequality as well as important redistributional effects as transaction patterns and cash constraints are not evenly distributed for different income groups. We build a monetary growth model where money is introduced via a Cash-In-Advance (CIA) constraint. Our model successfully generates patterns of income, wealth, and earnings inequality in the U.S. and we use this framework to analyze the redistributional impact of long-run inflation. We observe significant redistributional effects as inflation acts as a regressive tax on consumption; it adversely affects households at the bottom of the income partition and benefits those at the top. This paper contributes to the recent and growing literature on the redistributive effects of monetary policy.

Keywords: Inflation; Redistribution; Inequality; Ex-ante Heterogeneity, Progressive taxation

JEL Classification: D31; E21; E31; E4; E52; H23

Suggested Citation

Kakar, Venoo and Daniels, Gerald, Role of Cash and Costs of Inflation for Different Income Groups in the U.S. (November 20, 2018). Available at SSRN: https://ssrn.com/abstract=3146675 or http://dx.doi.org/10.2139/ssrn.3146675

Venoo Kakar (Contact Author)

San Francisco State University ( email )

1600 Holloway Avenue
San Francisco, CA 94132
United States
4154053461 (Phone)
4153381057 (Fax)

HOME PAGE: http://www.venookakar.com

Gerald Daniels

Howard University ( email )

2400 Sixth St NW
Washington, DC 20059
United States
(202) 806-9895 (Phone)
(202) 806-4896 (Fax)

HOME PAGE: http://gerald-daniels.com/

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