On the distributive effects of inflation

October 29, 2015

By Charles Gottlieb


This paper undertakes a quantitative investigation of the effects of anticipated inflation on the distribution of household wealth and welfare. Consumer Finance Data on household financial wealth suggests that about a third of the US population holds all its financial assets in transaction accounts. The remaining two-third of the US population holds most of their financial assets outside transaction accounts. To account for this evidence, I introduce a portfolio choice in a standard incomplete markets model with heterogeneous agents. I calibrate the model economy to SCF 2010 US data and use this environment to study the distributive effects of changes in anticipated inflation. An increase in anticipated inflation leads households to reshuffle their portfolio towards real assets. This crowding-in of supply for real assets lowers equilibrium interest rates and thereby redistributes wealth from creditors to borrowers. Because borrowers have a higher marginal utility, this redistribution improves aggregate welfare. First, this paper shows that inflation acts not only a regressive consumption tax as in Erosa and Ventura (2002), but also as a progressive tax. Second, this paper shows that the welfare cost of inflation are even lower than the estimates computed by Lucas (2000) and Ireland (2009). Finally, this paper offers insights into why deflationary environments should be avoided.

Monetary models consistently get the result that the Friedman Rule is optimal. Here, long-run inflation is not bad at all, because it reallocates between debtors and creditors. Yet, somehow, the Fischer Equation must hold, right? If steady-state inflation is higher, nominal interest rates should just accordingly and this would be fully anticipated. There is no redistribution if this is anticipated and in steady-state. Help me if I am missing something.

Macro-Finance Separation by Force of Habit

October 23, 2015

By J. David Lopez-Salido, Francisco Vazquez-Grande, and Pierlauro Lopez


We incorporate risk premia variation arising from Campbell-Cochrane habit formation in a standard DSGE framework. We show how the simultaneous presence of consumption and labor habits can produce a separation between quantity and risk premia dynamics, and hence unite nonlinear habits and a production economy without compromising the ability of the model to fit macroeconomic variables. We can then use economic theory rather than a reduced-form approach to restrict several cashflow processes endogenously and study their pricing. First, nominal price rigidities explain an endogenous difference between aggregate consumption and market dividends and between real and nominal bonds that can rationalize two major asset pricing puzzles – an initially downward-sloping term structure of equity and an upward-sloping term structure of interest rates. Second, the model is able to explain the capital market’s reaction to a monetary policy shock documented by the extant literature.

Very nice paper that shows that accounting for habit formation, once more, can go a very long way in explaining the data. Time for this to become more frequently used in the literature.

Age-dependent taxes with endogenous human capital formation

October 21, 2015

By Carlos da Costa and Marcelo Santos


We calculate optimal age-dependent labor income taxes in an environment for which the age efficiency profile is endogenously determined by human capital investment. Heterogeneous individuals are exposed to idiosyncratic shocks to their human capital investments, a key element, along with the endogeneity of human capital itself in the determination of optimal age-dependent taxes. Our results highlight the complementary role of capital income taxation when human capital is endogenous. The nature of human capital accumulation is quantitatively relevant for determining the age dependence of income taxes. We assess the cost of ignoring the endogenous nature of age-efficiency profiles.

There is a growing literature on age-dependent taxation that was initially not taken too seriously. But there are really good reasons to look at it, in particular because not all generations have have been treated equally by economic events and policies in the past. And there are also life-cycle effects that matter a lot. Also, age-dependent taxation can help overcome issues with the financing of retirement pensions. This paper adds to the literature by showing that human capital accumulation considerations are important.

September 2015 Call for Papers

October 2, 2015

A few days late, and some deadlines are tight. Send them early to avoid the crunch.

Workshop of the Australasian Macroeconomic Society, Sydney (Australia), 11-13 December 2015.

Workshop on Macroeconomic Dynamics, Milano (Italy), 21 December 2015.

Workshop on Employment Policies and Heterogeneity in the Labor Market, Bonn (Germany), 4-5 March 2015.