Abstract
This paper analyses the effects of money shocks on macroeconomic aggregates in a tractable flexible-price, incomplete-markets environment that generates persistent wealth inequalities amongst agents. In this framework, current inflation redistribute wealth from the cash-rich employed to the cash-poor unemployed and induce the former to increase their labour supply in order to maintain their desired levels of consumption and precautionary savings. If the shocks are persistent, however, they also raise inflation expectations and thus deter the employed from saving and supplying labour. We relate the strength of these two inflation taxes to the underlying parameters of the model and study how they compete in determining the overall sign and slope of the implied ‘output–inflation tradeoff’ relation.
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We are particularly grateful to Chris Carroll, Jean-Michel Grandmont, Guy Laroque, Etienne Lehmann, Victor Rios-Rull, and two anonymous referees for their suggestions on earlier versions of this paper. We also received helpful comments from seminar participants at CREST-INSEE and participants at the 2007 T2M Conference (Paris) and the 2007 EEA-ESEM meeting (Budapest). Financial support from the French National Research Agency (ANR Grant no JCJC0157) is gratefully acknowledged. The usual disclaimers apply.
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Algan, Y., Challe, E. & Ragot, X. Incomplete markets and the output–inflation tradeoff. Econ Theory 46, 55–84 (2011). https://doi.org/10.1007/s00199-009-0499-0
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DOI: https://doi.org/10.1007/s00199-009-0499-0