Working Paper: CEPR ID: DP5167
Authors: Matthias Doepke; Martin Schneider
Abstract: This paper provides a quantitative assessment of the effects of inflation through changes in the value of nominal assets. We document nominal positions in the US across sectors as well as different groups of households, and estimate the redistribution brought about by a moderate inflation episode. Redistribution takes the form of 'ends-against-the-middle': the middle class gains at the cost of the rich and poor. In addition, inflation favours the young over the old, and hurts foreigners. A calibrated OLG model is used to assess the macroeconomic implications of this redistribution under alternative fiscal policy rules. We show that inflation-induced redistribution has a persistent negative effect on output, but improves the weighted welfare of domestic households.
Keywords: Inflation; Redistribution; Welfare
JEL Codes: D31; D58; E31; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflation (E31) | Lower real value of nominal assets and liabilities (G19) |
| Lower real value of nominal assets and liabilities (G19) | Redistribution of wealth from lenders to borrowers (G51) |
| Redistribution of wealth from lenders to borrowers (G51) | Middle class gains at the expense of rich and poor (D31) |
| Moderate inflation (E31) | Persistent negative effect on output (C22) |
| Moderate inflation (E31) | Improvement in weighted welfare of domestic households (D69) |
| Inflation-induced redistribution (H23) | Lasting effects on aggregate output and welfare (F62) |
| Inflation-induced redistribution (H23) | Favoring younger cohorts over older ones (J78) |
| Government behavior in response to inflation (E31) | Determines who gains and who loses in the economy (D30) |