The Burden of Unanticipated Inflation: Analysis of an Overlapping Generations Model with Progressive Income Taxation and Staggered Prices
34 Pages Posted: 3 Apr 2007
Date Written: February 2007
Inflation is often associated with a loss for the poor in the medium and long run. The cyclical effects are basically unknown. We study this question in a dynamic optimizing sticky price model. Agents are heterogeneous with regard to their age and their productivity. We emphasize three channels through which unanticipated inflation affects the income and wealth distribution: 1) factor prices, 2) the 'bracket creep', and 3) sticky pensions. In our model, unanticipated inflation decreases the inequality of factor income, while the redistributive effect of inflation on total income depends on whether the government is spending the additional revenues on transfers or public consumption.
Keywords: unanticipated inflation, wealth distribution, income distribution, inequality, progressive income taxation, Calvo price staggering
JEL Classification: E31, E32, E52, D31, D58
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