Optimal Inflation to Reduce Inequality

Lorenzo Menna () and Patrizio Tirelli

No 353, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: A popular argument in favour of price stability is that the inflation-tax burden would disproportionately fall on the poor because wealth is unevenly distributed and portfolio composition of poorer households is skewed towards a larger share of money holdings. We reconsider the issue in a DSGE model characterized by limited participation to the market for interest bearing assets (LAMP). We show that a combination of higher in ation and lower income taxes reduces inequality. When we calibrate the share of constrained agents to fit the wealth Gini index for the US, the optimal inflation rate is above 4%. This result is robust to alternative foundations of money demand equations.

Keywords: in ation; monetary and fiscal policy; Ramsey plan; inequality (search for similar items in EconPapers)
JEL-codes: E24 E52 E58 J51 (search for similar items in EconPapers)
Pages: 33
Date: 2016-11-01, Revised 2016-11-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Optimal inflation to reduce inequality (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:353

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