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Incomplete Markets and the Output-inflation Tradeoff



Type:   Working paper
Titre:   Incomplete Markets and the Output-inflation Tradeoff
Auteur(s):   Algan, Yann (1974-...) - Ecole d'Économie de Paris - Paris School of Economics (EEP-PSE) (Auteur)
Challe, Edouard - Université Paris-Dauphine - Paris IX (Auteur)
Ragot, Xavier - Département d'économie (Auteur)
Date de publication:   2008-03
Éditeur:   Paris  :  Paris-Jourdan Sciences Economiques
Collection:   PSE Working Paper  :  2006 - 45
Mots-clés:   [] incomplete markets, borrowing constraints, short-run nonn-eutrality
JEL:   E24,  E31,  E32
Résumé:   [en] This paper analyses the effects of money shocks on macroeconomic aggregates in a flexible-price, incomplete-markets environment that generates persistent wealth inequalities amongst agents. In this framework, unexpected money shocks 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. The reduced-form dynamics of the model is a textbook "output-inflation tradeoff" equation whereby inflation shocks raise current output. The attenuating role of mean inflation and money growth persistence on this non-neutrality tradeoff, as well as some of the welfare implications of wealth redistribution, are also examined.

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