Nominal Maturity Mismatch and the Liquidity Cost of Inflation

Yu-Ting Chiang and Ezra Karger ()
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Yu-Ting Chiang: https://research.stlouisfed.org/econ/chiang/oc/

No 2024-031, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We document a liquidity channel through which unexpected inflation generates substantial welfare losses. Household balance sheets are nominal maturity mismatched: nominal liabilities have a longer duration than nominal assets. Due to this mismatch, losses from unexpected inflation are concentrated over short time horizons, while gains are spread out over the longer run. This has negative effects on liquidity-constrained households, who cannot easily borrow against their future gains. We quantify the importance of the liquidity channel and show that, for households in the lower half of the wealth distribution, the recent 2021–2022 unexpected inflation shock caused welfare losses valued at 0.5% of lifetime wealth: a monetary loss equal in size to 15% of current- year consumption. More than 75% of that loss is due to the liquidity channel, with the remainder coming from the more commonly studied wealth channel.

Keywords: inflation; household illiquidity; household balance sheet; nominal rigidity (search for similar items in EconPapers)
JEL-codes: E2 E3 G5 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2024-09-30
New Economics Papers: this item is included in nep-ban and nep-mon
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Citations: View citations in EconPapers (1)

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DOI: 10.20955/wp.2024.031

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