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The redistributive effects of inflation and the shape of money demand

Paola Boel

Journal of Economic Dynamics and Control, 2018, vol. 90, issue C, 208-219

Abstract: I quantify the distributional effects of expected inflation in a sample of OECD countries using a microfounded model of money where agents differ in their consumption risk, against which they can insure using money and government bonds. The model is calibrated using harmonized wealth microdata from the Luxembourg Wealth Study. I find that the inflation tax is progressive for low inflation levels, but it becomes regressive as inflation increases. Cut-off points vary across countries and depend on discount factors and heterogeneity in consumption risk across agents. Moreover, I find that the magnitude of inflation’s distributional impact depends not only on wealth distribution but also, and importantly, on the curvature and height of the money demand curve. Indeed, a higher and less elastic money demand leads to more regressive effects of inflation, thus implying such effects are not necessarily stronger in a country with a more unequal wealth distribution.

Keywords: Money; Heterogeneity; Calibration; Welfare cost of inflation (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2018
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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Handle: RePEc:eee:dyncon:v:90:y:2018:i:c:p:208-219