DP5167 Real Effects of Inflation Through the Redistribution of Nominal Wealth

Author(s): Matthias Doepke, Martin Schneider
Publication Date: August 2005
Keyword(s): inflation, redistribution, welfare
JEL(s): D31, D58, E31, E50
Programme Areas: International Macroeconomics, Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5167

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.