Working Paper: NBER ID: w31896
Authors: Filippo Pallotti; Gonzalo Pazpardo; Jiri Slacalek; Oreste Tristani; Giovanni L. Violante
Abstract: We measure the heterogeneous welfare effects of the recent inflation surge across households in the Euro Area. A simple framework illustrating the numerous channels of the transmission mechanism of surprise inflation to household welfare guides our empirical exercise. By combining micro data and aggregate time series, we conclude that: (i) country-level average welfare costs—expressed as a share of 2021–22 income—were larger than a typical recession, and heterogeneous, e.g., 3% in France and 8% in Italy; (ii) this inflation episode resembles an age-dependent tax, with the elderly losing up to 20%, and roughly half of the 25–44 year-old winning; (iii) losses were quite uniform across consumption quantiles because rigid rents served as a hedge for the poor; (iv) nominal net positions are the key driver of heterogeneity across-households; (v) the rise in energy prices generated vast variation in individual-level inflation rates, but unconventional fiscal policies were critical in shielding the most vulnerable households
Keywords: inflation; household welfare; euro area; energy prices; fiscal policy
JEL Codes: E31; E58; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation (E31) | household welfare (I38) |
| age-dependent tax (H29) | elderly households' welfare (J14) |
| housing costs (R21) | welfare outcomes (I38) |
| nominal net positions (G19) | heterogeneity of welfare effects (D69) |
| unconventional fiscal policies (E62) | vulnerable households' welfare (H53) |