Working Paper: NBER ID: w12319
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 labor 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: Inflation; Redistribution; Welfare Effects; Overlapping Generations Model
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 (G19) |
| Reduces the real value of nominal claims (G19) | Redistributes wealth from lenders to borrowers (G51) |
| Redistributes wealth from lenders to borrowers (G51) | Decreases overall labor supply (J29) |
| Decreases overall labor supply (J29) | Persistent negative effect on output (C22) |
| Unanticipated inflation (E31) | Increases consumption of younger households (D19) |
| Unanticipated inflation (E31) | Decreases consumption of retirees (J26) |
| Unanticipated inflation (E31) | Improves overall weighted welfare of domestic households (D69) |
| Unanticipated inflation (E31) | Reduces real government debt (H63) |
| Reduces real government debt (H63) | Affects fiscal policy decisions (E62) |