Inequality in the Welfare Costs of Disinflation

Benjamin Pugsley and Hannah Rubinton

No 2020-021, Working Papers from Federal Reserve Bank of St. Louis

Abstract: 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. 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 and the actual changes in the nominal interest rate and inflation during the Volcker disinflation, nearly 60 percent of all households would prefer to avoid the disinflation. This share depends negatively on the liquidity value of money, positively on the average duration of nominal borrowing, and positively on the short-run increase in the real interest rate.

Keywords: Monetary Policy; Inequality; Redistribution (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2019-12-04, Revised 2021-09-23
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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DOI: 10.20955/wp.2020.021

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