Deflation Forces and Inequality

35 Pages Posted: 17 Apr 2018

See all articles by Rod Tyers

Rod Tyers

Australian National University (ANU) - School of Economics; The University of Western Australia - Department of Economics

Yixiao Zhou

Australian National University (ANU) - Crawford School of Public Policy

Date Written: April 3, 2018

Abstract

Proximity to short yield zero lower bounds has challenged the inflation targeting central banks of the advanced regions. Central to this development are three-decade declining trends in long yields and underlying real, equilibrium interest rates that have flattened yield curves, restricting “normalisation” and adding deflationary pressure by boosting demand for portfolio money. Inflationary forces, such as fiscal deficits, industrial protection and resurgent regional growth, have proved comparatively weak. In this paper global modelling is used to show that key deflationary forces in these regions include automation, the race to the bottom in capital taxation and immigration. Each is shown to redistribute income so as to expand the welfare gap between the low-skilled and capital owners by 2.5 to 3.5 per cent per year. The high saving rates of capital owners depress real equilibrium rates and their expanding portfolios demand monetary expansion. These forces ensure that the challenges of macro stabilisation and distributional policy making are both intertwined and urgent.

Keywords: Inflation, deflation, productivity, automation, income distribution, tax, transfers, general equilibrium analysis

JEL Classification: D33, E52, J11, O33

Suggested Citation

Tyers, Rod and Zhou, Yixiao, Deflation Forces and Inequality (April 3, 2018). CAMA Working Paper No. 15/2018. Available at SSRN: https://ssrn.com/abstract=3156002 or http://dx.doi.org/10.2139/ssrn.3156002

Rod Tyers (Contact Author)

Australian National University (ANU) - School of Economics ( email )

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Australian National University
Canberra, Australian Capital Territory 0200
Australia
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The University of Western Australia - Department of Economics ( email )

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Crawley, Western Australia 6009
Australia
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HOME PAGE: http://www.business.uwa.edu.au/school/staff-profiles?type=profile&dn=cn%3DRodney%20Tyers%2Cou%3DEcon

Yixiao Zhou

Australian National University (ANU) - Crawford School of Public Policy ( email )

7 Liversidge Street
Lennox Crossing
Canberra, ACT 0200
Australia

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