Tradeoffs for the poor, divine coincidence for the rich

Marco Del Negro, Ibrahima Diagne, Keshav Dogra, Pranay Gundam, Donggyu Lee and Brian Pacula

No 20084, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We use an estimated medium-scale HANK model to investigate how the tradeoff between stabilizing inflation and consumption volatility varies for households with different levels of wealth. Consumption for the rich is mostly affected by demand shocks via their exposure to highly procyclical profits---for them, stabilizing consumption and inflation coincide. The poor are more vulnerable to supply shocks, hence aggressively stabilizing inflation is costly in terms of their consumption volatility. While they dislike inflation because it erodes real wages, they are hurt even more by an aggressive monetary policy response to inflation, which reduces real wages further while increasing unemployment.

JEL-codes: E12 E31 E52 E58 (search for similar items in EconPapers)
Date: 2025-03
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