Inflation as a Redistribution Shock: Effects on Aggregates and Welfare

Matthias Doepke () and Martin Schneider ()

No 5939, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Episodes of unanticipated inflation reduce the real value of nominal claims and thus redistribute wealth from lenders to borrowers. In this study, we consider redistribution as a channel for aggregate and welfare effects of inflation. We model an inflation episode as an unanticipated shock to the wealth distribution in a quantitative overlapping-generations model of the U.S. economy. While the redistribution shock is zero sum, households react asymmetrically, mostly because borrowers are younger on average than lenders. As a result, inflation generates a decrease in labour supply as well as an increase in savings. Even though inflation-induced redistribution has a persistent negative effect on output, it improves the weighted welfare of domestic households.

Keywords: aggregate effects; inflation; redistribution; welfare (search for similar items in EconPapers)
JEL-codes: D31 D58 E31 E50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2006-11
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Working Paper: Inflation as a Redistribution Shock: Effects on Aggregates and Welfare (2006)
Working Paper: Inflation as a Redistribution Shock: Effects on Aggregates and Welfare
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