Optimal Redistributive Inflation

Galo Nuño Barrau and Carlos Thomas

Annals of Economics and Statistics, 2022, issue 146, 3-63

Abstract: We analyze Ramsey-optimal monetary policy under commitment in an economy with uninsurable idiosyncratic risk, long-term nominal bonds and costly inflation. Our model features two transmission channels of monetary policy: a Fisher channel, arising from the impact of inflation on the initial price of long-term bonds, and a liquidity channel. The Fisher channel gives the central bank a reason to inflate for redistributive purposes, because debtors have a higher marginal utility than creditors. This inflationary motive fades over time as bonds mature and the central bank pursues a deflationary path to raise bond prices and thus relax borrowing limits. The result is optimal inflation front-loading. Numerically, we find that optimal policy implies a large consumption and welfare redistribution vis-à-vis a zero inflation policy.

Keywords: Optimal Monetary Policy; Incomplete Markets; Nominal Debt; Inflation; Redistributive Effects; Continuous Time (search for similar items in EconPapers)
JEL-codes: E5 E62 F34 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:2022:i:146:p:3-63

DOI: 10.2307/48674138

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