Incomplete markets and the output-inflation tradeoff

Yann Algan, Edouard Challe and Xavier Ragot

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Abstract: This paper analyses the effects of money shocks on macroeconomic aggregates in a tractable flexible-price, incomplete-markets environment that generates persistent wealth inequalities amongst agents. In this framework, current inflation redistribute wealth from the cash-rich employed to the cash-poor unemployed and induce the former to increase their labour supply in order to maintain their desired levels of consumption and precautionary savings. If the shocks are persistent, however, they also raise inflation expectations and thus deter the employed from saving and supplying labour. We relate the strength of these two inflation taxes to the underlying parameters of the model and study how they compete in determining the overall sign and slope of the implied ‘output–inflation tradeoff' relation.

Keywords: Incomplete Markets; Borrowing Constraints; Short-Run Non-Neutrality (search for similar items in EconPapers)
Date: 2011-01
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01169657
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Citations: View citations in EconPapers (13)

Published in Economic Theory, 2011, 46 (1), pp.55-84. ⟨10.1007/s00199-009-0499-0⟩

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Related works:
Journal Article: Incomplete markets and the output–inflation tradeoff (2011)
Working Paper: Incomplete markets and the output-inflation tradeoff (2011)
Working Paper: Incomplete markets and the output-inflation tradeoff (2008)
Working Paper: Incomplete markets and the output-inflation tradeoff (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01169657

DOI: 10.1007/s00199-009-0499-0

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