The real effect of inflation in liquidity constrained models

Xavier Ragot

PSE Working Papers from HAL

Abstract: This article identifies a new channel through which inflation affects the real economy. In a simple monetary model where agents face heterogenous income flows, it is proven that credit constraints create heterogeneity in money demand. Because of this heterogeneity, long run inflation affects the real interest rate and real variables, even when there are no redistributive effects, no distorting fiscal policy, no substitution between leisure and working time, and when prices are flexible. For realistic utility functions, inflation is found to raise the capital stock, but to decrease welfare.

Keywords: inflation; credit constraints; heterogenous agents (search for similar items in EconPapers)
Date: 2005-12
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00590556v1
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Working Paper: The real effect of inflation in liquidity constrained models (2005)
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