Working Paper: CEPR ID: DP5939
Authors: Matthias Doepke; Martin Schneider
Abstract: Episodes of unanticipated inflation reduce the real value of nominal claims and thus redistribute wealth from lenders to borrowers. In this study, we consider redistribution as a channel for aggregate and welfare effects of inflation. We model an inflation episode as an unanticipated shock to the wealth distribution in a quantitative overlapping-generations model of the U.S. economy. While the redistribution shock is zero sum, households react asymmetrically, mostly because borrowers are younger on average than lenders. As a result, inflation generates a decrease in labour supply as well as an increase in savings. Even though inflation-induced redistribution has a persistent negative effect on output, it improves the weighted welfare of domestic households.
Keywords: aggregate effects; 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 |
|---|---|
| unanticipated inflation (E31) | reduces the real value of nominal claims (D46) |
| reduces the real value of nominal claims (D46) | redistributes wealth from lenders (older households) to borrowers (younger households) (G51) |
| redistributes wealth from lenders (older households) to borrowers (younger households) (G51) | decreases labor supply among younger winners (J79) |
| decreases labor supply among younger winners (J79) | declines overall labor supply by up to 2% (J49) |
| unanticipated inflation (E31) | increases savings among younger households (D14) |
| increases savings among younger households (D14) | contributes to a capital stock increase of up to 13% (E22) |
| unanticipated inflation (E31) | decline in output of up to 12% relative to trend (F44) |
| unanticipated inflation (E31) | consumption declines of up to 14% for retirees (J26) |
| unanticipated inflation (E31) | increases in consumption by up to 6% for younger cohorts (D15) |
| unanticipated inflation (E31) | positive aggregate welfare effect on domestic households (D69) |
| redistribution effect (H23) | levels the overall wealth distribution (D31) |
| redistribution effect (H23) | improves weighted welfare measures (D60) |