Deflation forces and inequality

Rodney Tyers and Yixiao Zhou

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Proximity to short yield zero lower bounds has challenged the inflation targeting central banks of the advanced regions. Central to this development are three-decade declining trends in long yields and underlying real, equilibrium interest rates that have flattened yield curves, restricting “normalisation” and adding deflationary pressure by boosting demand for portfolio money. Inflationary forces, such as fiscal deficits, industrial protection and resurgent regional growth, have proved comparatively weak. In this paper global modelling is used to show that key deflationary forces in these regions include automation, the race to the bottom in capital taxation and immigration. Each is shown to redistribute income so as to expand the welfare gap between the low-skilled and capital owners by 2.5 to 3.5 per cent per year. The high saving rates of capital owners depress real equilibrium rates and their expanding portfolios demand monetary expansion. These forces ensure that the challenges of macro stabilisation and distributional policy making are both intertwined and urgent.

Keywords: Inflation; deflation; productivity; automation; income distribution; tax; transfers; general equilibrium analysis (search for similar items in EconPapers)
JEL-codes: D33 E52 J11 O33 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2018-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: Deflation Forces and Inequality (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2018-15

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