Disinflation, Inequality and Welfare in a TANK Model

Maria Ferrara and Patrizio Tirelli

No 402, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We investigate the redistributive and welfare effects of disinflation in a two-agent New Keynesian (TANK) model characterized by Limited Asset Market Participation (LAMP) and wealth inequality. We highlight two key mechanisms driving our long-run results: i) the cash in advance constraint on firms working capital (CIA); ii) dividends endogeneity. These two channels point in opposite directions. Lower inflation softens the CIA and, by raising labor demand, lowers inequality. But the disinflation also raises dividends and this increases inequality. The disinflation is always welfare-improving for asset holders. We obtain ambiguous results for non-asset holders, who suffer substantial consumption losses during the transition.

Keywords: Firms Pricing; Disinflation; Inequality; Welfare Economics (search for similar items in EconPapers)
JEL-codes: D3 D6 E31 E5 (search for similar items in EconPapers)
Pages: 37
Date: 2019-02, Revised 2019-02
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: DISINFLATION, INEQUALITY, AND WELFARE IN A TANK MODEL (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:402

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