Type
Article
Title
Incomplete markets and the output–inflation tradeoff
In
Economic Theory
Author(s)
ALGAN Yann - Département d'économie (Author)
CHALLE Edouard - Observatoire français des conjonctures économiques (Author)
RAGOT Xavier - Banque de France (Author)
Editor
DE : Springer
Volume
46
Number
1
Pages
55 - 84 p.
ISSN
09382259
Keywords
Incomplete Markets, Borrowing Constraints, Short-Run Non-Neutrality
Abstract
EN
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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