Nominal Maturity Mismatch and the Liquidity Cost of Inflation

Yu-Ting Chiang and Ezra Karger ()
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Yu-Ting Chiang: https://research.stlouisfed.org/econ/chiang/oc/

No 2024-031, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We document a liquidity channel through which unexpected inflation generates substantial welfare losses. Households hold nominal liabilities with longer duration than their nominal assets. Due to this mismatch, losses from unexpected inflation concentrate over short horizons while gains accumulate over the long run, harming liquidity-constrained households who cannot borrow against future gains. The 2021–2022 inflation shock caused welfare losses valued at 1.1% of lifetime wealth for the lower half of the wealth distribution—equivalent in dollar terms to 47% of annual consumption. More than three-quarters of this loss comes from our liquidity channel rather than the traditional wealth channel.

Keywords: inflation; borrowing constraints; maturity mismatch; household heterogeneity (search for similar items in EconPapers)
JEL-codes: E2 E3 G5 (search for similar items in EconPapers)
Pages: 78 pages
Date: 2024-09-30, Revised 2025-12-09
New Economics Papers: this item is included in nep-ban and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:98882

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DOI: 10.20955/wp.2024.031

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