Optimal inflation to reduce inequality

Lorenzo Menna and Patrizio Tirelli

Review of Economic Dynamics, 2017, vol. 24, 79-94

Abstract: A popular argument in favour of price stability is that the inflation-tax burden would disproportionately fall on the poor because wealth is unevenly distributed and portfolio composition of poorer households is skewed towards a larger share of money holdings. We reconsider the issue in a DSGE model characterized by limited participation to the market for interest bearing assets (LAMP). We show that a combination of higher inflation and lower income taxes reduces inequality. When we calibrate the share of constrained agents to fit the wealth Gini index for the US, the optimal inflation rate is above 4%. This result is robust to alternative foundations of money demand equations. (Copyright: Elsevier)

Keywords: Inflation; Monetary and fiscal policy; Ramsey plan; Inequality (search for similar items in EconPapers)
JEL-codes: E24 E52 E58 J51 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (19)

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DOI: 10.1016/j.red.2017.01.004

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