Aggregate and welfare effects of redistribution of wealth under inflation and price-level targeting

Abstract

Since the work of Doepke and Schneider (2006a) and Meh and Terajima (2008), we know that inflation causes major redistribution of wealth -between households and the government, between nationals and foreigners, and between households within the same country. Two types of monetary policy, inflation targeting (IT) and price level targeting (PT), have very different implications for the price level path subsequent to a price-level shock, and consequently, have different redistributional properties which is what we explore in this paper. For Canada, we show that the magnitude of redistributions of an unexpected 1% price-level increase under IT is about three times larger than under PT. Households' and foreigners' wealth losses from a price level increase is matched by the gains of the government. Even though this redistribution is zero-sum, we observe positive effects on GDP due to the wealth loss, the lower value of the debt and its associated fiscal adjustment, and the non-linear effects on work effort of the redistribution of wealth across households. Finally, the direction of the change in the weighted welfare of households depends on the fiscal policy. en fonction du niveau des prix -ont des répercussions très différentes sur l'évolution du niveau des prix après une variation inattendue de ce dernier, et donc des effets de redistribution dissemblables. Ce sont ces effets qui intéressent les auteurs. Ceux-ci montrent que, au Canada, les effets de redistribution d'une hausse imprévue de 1 % du niveau des prix sont environ trois fois plus élevés si l'on prend pour cible le taux d'inflation plutôt que le niveau des prix. Les pertes des ménages et des non-résidents attribuables à une élévation du niveau des prix sont compensées par les gains de l'État. Même si les pertes et les gains s'annulent, le produit intérieur brut augmente par suite de la baisse de la richesse, du recul de la dette en termes réels et de l'assainissement concomitant des finances publiques ainsi qu'à la faveur des effets non linéaires de la redistribution iv de la richesse entre les ménages sur l'offre de travail. Enfin, le sens de la variation du bien-être pondéré des ménages dépend de la politique budgétaire. JEL classification: D31, E21, E31, E44, E52, E63

The Burden of Unanticipated Inflation: Analysis of an Overlapping-Generations Model With Progressive Income Taxation and Staggered Prices

“…In addition, foreigners are net lenders in the United States, whereas they are net borrowers in Canada. In accordance with Doepke and Schneider (2006b), Meh and Terajima (2008) find that the redistribution of an unanticipated increase of inflation is large. In particular, the changes in wealth among the different age and household classes and the redistribution from the households to the government sector following an unexpected increase of 1% over five years amounts to several percentage points of GDP in Canada.…”

“…In particular, the changes in wealth among the different age and household classes and the redistribution from the households to the government sector following an unexpected increase of 1% over five years amounts to several percentage points of GDP in Canada. Meh et al (2008) show that the magnitude of the redistribution depends on monetary policy. For Canada, inflation targeting results in wealth changes that are about three times larger than those associated with price-level targeting.…”

“…In addition, aggregate output decreases, whereas average welfare rises. Meh and Terajima (2008) apply the methods of Doepke and Schneider (2006b) to study the effects of unanticipated inflation on redistribution in Canada. The household distribution of nominal assets is similar in the United States and Canada.…”

Distributional consequences of asset price inflation in the Euro Area

“…Adam and Zhu (2015) report results for the redistributive effects of surprise deflation and inflation in the Euro Area; Meh and Terajima (2008) report results for Canada. Meh, Ríos-Rull and Terajima (2010) analyze the welfare implications of inflation targeting and price-level targeting strategies, calibrating their model to the nominal wealth positions documented for Canadian data. Brunnermeier and Sannikov (2013) discuss the redistributive effects of monetary policy in a setting with financial frictions and how policy can occasionally use these effects of avoid liquidity and deflationary spirals.…”

On the welfare cost of rare housing disasters

“…(b) Since forecasting rules (22) and (23) (31) subject to the same constraints in (24) except with an arbitrary house pricep, but with the continuation value still being the one de…ned in (24). This results in policy functions a 0 (:;p) and h 0 (:;p).…”