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Preferences, inflation, and welfare

Michael Curran and Scott J. Dressler

European Economic Review, 2020, vol. 130, issue C

Abstract: This paper systematically examines how degrees of household risk aversion (RA) and elasticity of intertemporal substitution (EIS) impact the welfare costs of inflation in a heterogeneous-agent environment featuring capital and essential money. Empirical evidence suggests that households have degrees of RA and EIS that differ on average from traditional values and display large amounts of dispersion. Capturing these empirical features of preference values in an otherwise standard model leads to welfare enhancements of inflation due to household substitution of money for capital. The analysis also compares the welfare implications for alternative ways to implement monetary policy.

Keywords: Inflation; Welfare; Ex-ante heterogeneity; Recursive preferences (search for similar items in EconPapers)
JEL-codes: E21 E41 E50 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.euroecorev.2020.103594

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