Permanent Income Shocks and Inflation

Balázs Zélity

No 2020-003, Wesleyan Economics Working Papers from Wesleyan University, Department of Economics

Abstract: A puzzle in the literature on the macroeconomic effects of permanent income shocks is that exogenous permanent Social Security shocks do not have a sustained positive effect on real aggregate consumption. It has been argued that this is due to the implementation of contractionary monetary policy in wake of these benefit increases. This paper documents an alternative, potentially complementary explanation for the puzzle. Namely, using exogenous permanent Social Security shocks as well as minimum wage increases, I show that these permanent income shocks lead to an increase in inflation. Thus while nominal aggregate consumption gains can be observed in the data, real gains are small to non-existent due to the higher price level.

Keywords: permanent income shocks; Social Security; minimum wage; inflation (search for similar items in EconPapers)
JEL-codes: E21 E31 E62 E63 H31 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2020-06
New Economics Papers: this item is included in nep-mac
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Journal Article: Permanent income shocks and inflation (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:wes:weswpa:2020-003

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