Disinflation, Inequality and Welfare in a TANK Model
37 Pages Posted: 19 Feb 2019
Date Written: February 18, 2019
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: Suggested Citation