Demographics, Redistribution, and Optimal Inflation

James Bullard, Carlos Garriga () and Christopher Waller

No 12-E-13, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: We study the interaction between population demographics, the desire for redistribution in the economy, and the optimal inflation rate in a deterministic economy with capital. The intergenerational redistribution tension is intrinsic in the general equilibrium life-cycle models we use. Young cohorts do not initially have any assets and wages are the main source of income; they prefer relatively low real interest rates, relatively high wages, and relatively high rates of inflation. Older generations work less and prefer higher rates of return from their savings, relatively low wages, and relatively low inflation. In the absence of intergenerational redistribution via lump-sum taxes and transfers, the constrained efficient competitive equilibrium entails optimal distortions on relative prices. We allow the planner to use inflation to try to achieve the optimal distortions. In the economy changes in the population structure are interpreted as the ability of a particular cohort to influence the redistributive policy. When the old have more influence on the redistributive policy, the economy has a relatively low steady state level of capital and a relatively low steady state rate of inflation. The opposite happens as young cohorts have more control of policy. These results suggest that aging population structures like those in Japan may contribute to observed low rates of inflation or even deflation.

Keywords: monetary policy; inflation bias; deflation; central bank design (search for similar items in EconPapers)
JEL-codes: D7 E4 E5 (search for similar items in EconPapers)
Date: 2012-09
New Economics Papers: this item is included in nep-age, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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Related works:
Journal Article: Demographics, redistribution, and optimal inflation (2012)
Working Paper: Demographics, redistribution, and optimal inflation (2012)
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