Disinflation and Inequality in a DSGE monetary model: A Welfare Analysis

Maria Ferrara and Patrizio Tirelli

No 305, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We investigate the redistributive e¤ects of a disinflation experiment in an otherwise standard medium-scale DSGE model augmented for Limited Asset Market Participation, implying that a fraction of households do not hold any wealth. We highlight two key mechanisms driving consumption and income distribution: i) the cash in advance constraint on firms working capital needs; ii) the response of profit margins to disinflation, which is crucially dependent on the two most used pricing assumptions in the New-Keynesian literature, i.e. Calvo vs Rotemberg. Results show that disinflation softens the cash in advance constraint and raises the real wage in steady state. This, in turn, lowers inequality. While under the Calvo formalism this e¤ect is reinforced by the fall of price markups, under Rotemberg it is more than compensated by the increase of price markups and, therefore, the opposite result obtains.

Keywords: Disinflation; Inequality; Welfare; LAMP; Monetary Policy; Calvo Price Adjustment; Rotemberg Price Adjustment (search for similar items in EconPapers)
JEL-codes: E31 E5 (search for similar items in EconPapers)
Pages: 35
Date: 2015-07, Revised 2015-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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