Type
Working paper
Titre
Incomplete Markets and the Output-inflation Tradeoff
Dans
PSE Working Paper
Éditeur
Paris : Paris-Jourdan Sciences Economiques
Collection
PSE Working Paper : 2006 - 45
Mots clés
incomplete markets, borrowing constraints, short-run nonn-eutrality
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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