Trend Inflation Shocks and Financial Heterogeneity

Evi Pappa, Sebastian Rast and Alejandro Vicondoa

No 21365, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show that housing tenure status shapes the distributional effects of trend inflation. Using a trend-cycle model and principal component analysis, we identify trend inflation innovations linked to monetary and corporate tax shocks. Trend inflation redistributes resources through debt revaluation, asset price movements, and income composition. Monetary expansions raise house prices, benefiting outright owners and mortgagors. Corporate-tax-driven shocks resemble adverse supply disturbances, lowering house prices and generating gains only for mortgagors through reduced real debt burdens. Outright owners are partly insulated through financial income, while renters consistently lose as inflation erodes their labor income without offsetting valuation gains.

Date: 2026-04
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