Inequality in the Welfare Costs of Disinflation
40 Pages Posted: 24 Jul 2020
Date Written: December 1, 2019
We use an incomplete markets economy to quantify the distribution of welfare gains and losses of the US "Volcker" disinflation. In the long run households prefer low inflation, but disinflation requires a transition period and a redistribution from net nominal borrowers to net nominal savers. Even with perfectly flexible prices, welfare costs may be significant for households with nominal liabilities. When calibrated to match the micro and macro moments of the early 1980s high inflation environment, almost half of all borrowers (14 percent of all households) would prefer to avoid the redistribution and equilibrium effects of the disinflation. This share depends negatively on the liquidity value of money and positively on the average duration of nominal borrowing.
Keywords: Monetary Policy, Inequality, Redistribution
JEL Classification: E31, E52
Suggested Citation: Suggested Citation