Inflation as a Redistribution Shock: Effects on Aggregates and Welfare

46 Pages Posted: 14 Jul 2006 Last revised: 31 Aug 2010

See all articles by Matthias Doepke

Matthias Doepke

Northwestern University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Martin Schneider

Independent

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Date Written: June 2006

Abstract

Episodes of unanticipated inflation reduce the real value of nominal claims and thus redistribute wealth from lenders to borrowers. In this study, we consider redistribution as a channel for aggregate and welfare effects of inflation. We model an inflation episode as an unanticipated shock to the wealth distribution in a quantitative overlapping-generations model of the U.S. economy. While the redistribution shock is zero sum, households react asymmetrically, mostly because borrowers are younger on average than lenders. As a result, inflation generates a decrease in labor supply as well as an increase in savings. Even though inflation-induced redistribution has a persistent negative effect on output, it improves the weighted welfare of domestic households.

Suggested Citation

Doepke, Matthias and Schneider, Martin, Inflation as a Redistribution Shock: Effects on Aggregates and Welfare (June 2006). NBER Working Paper No. w12319. Available at SSRN: https://ssrn.com/abstract=912429

Matthias Doepke (Contact Author)

Northwestern University - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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Martin Schneider

Independent ( email )

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United States

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