Inflation and Risk in Household Investment Decisions

Horacio Nicolás Tanzi ()
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Horacio Nicolás Tanzi: University of Buenos Aires, Argentina

Ensayos Económicos, 2025, vol. 1, issue 85, 92-127

Abstract: This study quantifies the steady-state effects of inflation on risk in household investment decisions. In a small open economy, using a New Keynesian heterogeneous agent model (HANK), a risky asset—capital—and a risk-free asset—bonds—are introduced. The return on capital is modeled through a variant of Calvo pricing, linking capital risk to inflation. The results indicate that incorporating the effect of inflation on capital risk leads to a reallocation of household portfolios, decreasing the stock of capital and increasing the stock of safe assets. This reallocation implies a reduction in steady state output.

Keywords: heterogeneous agents; household portfolio composition; inflation; investment; price stickiness; risk (search for similar items in EconPapers)
JEL-codes: E22 E31 E44 G11 G51 (search for similar items in EconPapers)
Date: 2025
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