Distributional and Welfare Consequences of Disinflation in Emerging Economies

Enes Sunel

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: This study investigates the distributional and welfare consequences of disinflation in emerging economies using a monetary model of a small open economy with uninsured idiosyncratic earnings risk. The model is calibrated to Turkish data and is used to compare stationary equilibria with quarterly inflation rates of 14.25% (for 1987 : Q1-2002 : Q4) and 2.25% (for 2003 : Q1- 2010 : Q2). Reduction in inflationary finance is assumed to affect lump-sum transfers, since government spending-to-GDP ratios have been roughly stable during disinflation in a number of emerging economies. Disinflation is found to lower aggregate welfare by 1.23% in terms of compensating consumption variation. This is because the reduction in the distortionary impediments of inflation on the poor falls short of the decline in their redistributive transfers income that is mainly financed by the rich. The shrinkage of cash transfers also tightens natural debt limits and increases the precautionary savings motive.

Keywords: Small open economy; incomplete markets; disinflation (search for similar items in EconPapers)
JEL-codes: D31 E52 F41 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ara, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1334

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