Disinflation, Inequality and Welfare in a TANK Model

37 Pages Posted: 19 Feb 2019

See all articles by Maria Ferrara

Maria Ferrara

Università degli Studi di Napoli “Parthenope”

Patrizio Tirelli

Department of Economics and Management; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Date Written: February 18, 2019

Abstract

We investigate the redistributive and welfare effects of disinflation in a two-agent New Keynesian (TANK) model characterized by Limited Asset Market Participation (LAMP) and wealth inequality. We highlight two key mechanisms driving our long-run results: i) the cash in advance constraint on firms working capital (CIA); ii) dividends endogeneity. These two channels point in opposite directions. Lower inflation softens the CIA and, by raising labor demand, lowers inequality. But the disinflation also raises dividends and this increases inequality. The disinflation is al- ways welfare-improving for asset holders. We obtain ambiguous results for non-asset holders, who suffer substantial consumption losses during the transition.

Keywords: Firms Pricing, Disinfiation, Inequality, Welfare Economics

JEL Classification: E31, E5, D3, D6

Suggested Citation

Ferrara, Maria and Tirelli, Patrizio, Disinflation, Inequality and Welfare in a TANK Model (February 18, 2019). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 402 (2019), Available at SSRN: https://ssrn.com/abstract=3337091 or http://dx.doi.org/10.2139/ssrn.3337091

Maria Ferrara

Università degli Studi di Napoli “Parthenope” ( email )

Naples
Italy

Patrizio Tirelli (Contact Author)

Department of Economics and Management ( email )

Corso Strada Nuova, 65
27100 Pavia, 27100
Italy

HOME PAGE: http://https://sites.google.com/site/patriziotirellihomepage/

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

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