Incomplete markets and the output-inflation tradeoff

Yann Algan (), Edouard Challe () and Xavier Ragot ()

PSE Working Papers from PSE (Ecole normale supérieure)

Abstract: This paper analyses the effects of money shocks on macroeconomic aggregates in a flexible-price, incomplete-markets environment that generates persistent wealth inequalities amongst agents. In this framework, unexpected money shocks redistribute wealth from the cash-rich employed to the cash-poor unemployed, and induce the former to increase their labour supply in order to maintain their desired levels of consumption and precautionary savings. The reduced-form dynamics of the model is a textbook "output-inflation tradeoff" equation whereby inflation shocks raise current output. The attenuating role of mean inflation and money growth persistence on this non-neutrality tradeoff, as well as some of the welfare implications of wealth redistribution, are also examined.

New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
Date: 2006-12, Revised 2008-03
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Persistent link: http://EconPapers.repec.org/RePEc:pse:psecon:2006-45

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