Hostname: page-component-848d4c4894-pjpqr Total loading time: 0 Render date: 2024-06-20T04:39:47.941Z Has data issue: false hasContentIssue false
  • English
  • Français

INFLATION AND INEQUALITY IN A GROWING ECONOMY WITH CASH AND CREDIT GOODS

Published online by Cambridge University Press:  07 September 2020

Juin-Jen Chang ,
Hsieh-Yu Lin ,
David W. Savitski  and
Hsueh-Fang Tsai
Juin-Jen Chang
Affiliation:
Academia Sinica
Hsieh-Yu Lin*
Affiliation:
Tunghai University
David W. Savitski
Affiliation:
I-Shou University
Hsueh-Fang Tsai
Affiliation:
Fu-Jen Catholic University
*
Address correspondence to: Hsieh-Yu Lin, Department of Economics, Tunghai University, Xitun, Taichung 40704, Taiwan, R.O.C. e-mail: hylin@thu.edu.tw. Phone: 886-4-23590702.
Get access Rights & Permissions [Opens in a new window]

Abstract

We develop a dynamic general equilibrium growth model, where households purchase final goods on cash or credit and have different capital and money endowments, to investigate whether inflation affects trends in income and consumption inequality. We show that, under a strong substitutability between cash and credit goods, inflation has a negative relationship with income inequality, but a U-shaped relationship with consumption inequality. The divergence between income and consumption inequality explains several recent empirical observations. This result has important policy implications, as consumption inequality better reflects the welfare distribution whereas income inequality fails to capture consumption disparities resulting from different consumption and asset distributions across households. In the growth model with heterogeneous households, there is a mixed relationship between growth and income inequality, confirming the existence of the Kuznets curve. The inflation-driven asset reallocation might also produce a Mundell–Tobin effect, enhancing growth.

Keywords

Consumption and Asset ReallocationsIncome and Consumption InequalityInflationGrowth
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 3 , April 2022 , pp. 579 - 612
Copyright
© Cambridge University Press 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank two anonymous referees, Ping Wang, Been-Lon Chen, and Ching-Chong Lai for their insightful comments on an earlier draft of this paper, whose inputs have led to a much improved paper. We are also grateful for financial support provided by the Ministry of Science and Technology, R.O.C. The usual disclaimer applies.

References

REFERENCES

Acemoglu, D. and Autor, D. (2011) Skills, tasks and technologies: Implications for employment and earnings. In: Ashenfelter, O. and Card, D. (eds.), Handbook of Labor Economics, Vol. 4B, Chapter 12, pp. 1043–1171. Amsterdam: Elsevier-North Holland.Google Scholar
Albanesi, S. (2007) Inflation and inequality. Journal of Monetary Economics 54, 1088–1114.CrossRefGoogle Scholar
Algan, Y., Cheron, A., Hairault, J. O. and Langot, F. (2003) “ Wealth effect on labor market transitions. Review of Economic Dynamics 6, 156–178.CrossRefGoogle Scholar
Al-Marhubi, F. A. (2000) Income inequality and inflation: The cross evidence. Contemporary Economic Policy 18, 428–439.CrossRefGoogle Scholar
Amaral, P. (2017) Monetary policy and inequality. Economic Commentary, Federal Reserve Bank of Cleveland, issue January.Google Scholar
Attanasio, O. and Pistaferri, L. (2016) Consumption inequality. Journal of Economic Perspectives 30, 3–28.CrossRefGoogle Scholar
Barro, R. J. (2000) Inequality and growth in a panel of countries. Journal of Economic Growth 5, 5–32.CrossRefGoogle Scholar
Bell, M. V. Joyce, Z. Liu and C. Young (2012) The distributional effects of asset purchases. Bank of England Quarterly Bulletin 52, 254–266.Google Scholar
Benhabib, J. and Farmer, R. E. (1994) Indeterminacy and increasing returns. Journal of Economic Theory 63, 19–41.CrossRefGoogle Scholar
Blundell, R. and Etheridge, B. (2010) Consumption, income and earnings inequality in Britain. Review of Economic Dynamics 13, 76–102.CrossRefGoogle Scholar
Blundell, R., Pistaferri, L. and Preston, I. (2008) “ Consumption inequality and partial insurance. American Economic Review 98, 1887–1921.CrossRefGoogle Scholar
Blundell, R. and Preston, I. (1998) Consumption inequality and income uncertainty. Quarterly Journal of Economics 113, 603–640.CrossRefGoogle Scholar
Boel, P. and Camera, G. (2009) Financial sophistication and the distribution of the welfare cost of inflation. Journal of Monetary Economics 56, 968–978.CrossRefGoogle Scholar
Caballero, R. J., Farhi, E. and Gourinchas, P. O. (2017) Rents, technical change, and risk premia accounting for secular trends in interest rates, returns on capital, earning yields, and factor shares. American Economic Review 107, 614–620.CrossRefGoogle Scholar
Cabanillas, L. G. and Ruscher, E. (2008) “The great moderation in the euro area: What role have macroeconomic policies played? European Economy Economic Papers No. 331, June (Brussels: Directorate General for Economic and Financial Affairs, European Commission).Google Scholar
Camera, G. and Chien, Y. (2016) Two monetary models with alternating markets. Journal of Money, Credit and Banking 48, 1051–1064.CrossRefGoogle Scholar
Chatterjee, S. and Turnovsky, S. J. (2012) Infrastructure and inequality. European Economic Review 56, 1730–1745.CrossRefGoogle Scholar
Christiano, L. J. (1988) Why does inventory investment fluctuate so much? Journal of Monetary Economics 21, 247–280.CrossRefGoogle Scholar
Coibion, O., Gorodnichenko, Y., Kueng, L. and Silvia, J. (2017) Innocent bystanders? Monetary policy and inequality in the US. Journal of Monetary Economics 88, 70–89.CrossRefGoogle Scholar
Cysne, R. P., Maldonado, W. L. and Monteiro, P. K. (2005) Inflation and income inequality: A shopping-time approach. Journal of Development Economics 78, 516–528.CrossRefGoogle Scholar
Daunfeldt, S. O., Fölster, S. and Hortlund, P. (2010) Consumption and Income Inequality in Sweden: A Different Story. No. 39, HUI Research.Google Scholar
Doepke, M. and Schneider, M. (2006) Inflation and the redistribution of nominal wealth. Journal of Political Economy 114, 1069–1097.CrossRefGoogle Scholar
Dolmas, J., Huffman, G. W. and Wynne, M. A. (2000) Inequality, inflation, and central bank independence. Canadian Journal of Economics/Revue canadienne d’éonomique 33, 271–287.CrossRefGoogle Scholar
Dutta, J., and Weale, M. (2001) Consumption and the means of payment: An empirical analysis for the United Kingdom. Economica 68, 293–316.CrossRefGoogle Scholar
Erosa, A., and Ventura, G. (2002) On Inflation as a regressive consumption tax. Journal of Monetary Economics 49, 761–795.CrossRefGoogle Scholar
Fisher, J. D., Johnson, D. S. and Smeeding, T. M. (2013) Measuring the trends in inequality of individuals and families: Income and consumption. American Economic Review 103, 184–188.CrossRefGoogle Scholar
Garca-Peñalosa, C. and Turnovsky, S. J., 2006. Growth and income inequality: A canonical model. Economic Theory 28, 25–49.CrossRefGoogle Scholar
García-Peñalosa, C. and Turnovsky, S. J. (2015) Income inequality, mobility, and the accumulation of capital. Macroeconomic Dynamics 19, 1332–1357.CrossRefGoogle Scholar
Goldberg, P. K. and Pavcnik, N. (2007) Distributional effects of globalization in developing countries. Journal of Economic Literature 45, 39–82.CrossRefGoogle Scholar
Hansen, G. and Wright, R. (1992) The labor market in real business cycle theory. In: Federal Reserve Bank of Minneapolis Quarterly Review, pp. 2–12, Spring.CrossRefGoogle Scholar
Holtz-Eakin, D., Joulfaian, D. and Rosen, H. S. (1993) The Carnegie conjecture: Some empirical evidence. Quarterly Journal of Economics 108, 413–435.CrossRefGoogle Scholar
İmrohoroğlu, A. (1992) The welfare cost of inflation under imperfect insurance. Journal of Economic Dynamics and Control 16, 79–91.CrossRefGoogle Scholar
International Labour Office (ILO) (2008) Labour institutions and inequality. In: World of Work Report, pp. 71–114. Geneva: International Labour Office.Google Scholar
Jin, Y. (2009) A note on inflation, economic growth, and income inequality. Macroeconomic Dynamics 13, 138–147.CrossRefGoogle Scholar
Juster, F. T. and Stafford, F. P. (1991) The allocation of time: Empirical findings, behavioral models, and problems of measurement. Journal of Economic Literature 29, 471–522.Google Scholar
Krueger, D. and Perri, F. (2006) Does income inequality lead to consumption inequality? Evidence and theory. Review of Economic Studies 73, 163–193.CrossRefGoogle Scholar
Kuznets, S. (1955) Economic growth and income inequality. American Economic Review 45, 1–28.Google Scholar
Lucas, R. Jr E. and N. L. Stokey (1983) Optimal fiscal and monetary policy in an economy without capital. Journal of Monetary Economics 12, 55–93.CrossRefGoogle Scholar
Lucas, R. Jr E. and N. L. Stokey (1987) Money and interest in a cash-in-advance economy. Econometrica 55, 491–513.CrossRefGoogle Scholar
Maestri, V. and Roventini, A. (2012) Inequality and macroeconomic factors: A time-series analysis for a set of OECD countries. LEM Papers Series 2012/21, Laboratory of Economics and Management (LEM), Sant’Anna School of Advanced Studies, Pisa.CrossRefGoogle Scholar
Mankiw, N. G. (1987) Government purchases and real interest rates. Journal of Political Economy 95, 407–419.CrossRefGoogle Scholar
McCloskey, D. N. (2014) Measured, unmeasured, mismeasured, and unjustified pessimism: A review essay of Thomas Piketty’s capital in the twenty-first century. Erasmus Journal for Philosophy and Economics 7, 73–115.CrossRefGoogle Scholar
Mersch, Y. (2014) Monetary policy and economic inequality. In: Keynote Speech, Corporate Credit Conference, October 17, 2014.Google Scholar
Meyer, B. D. and Sullivan, J. X. (2013) Consumption and income inequality and the great recession. American Economic Review 103, 178–183.CrossRefGoogle Scholar
Meyer, B. D. and Sullivan, J. X. (2017) Consumption and Income Inequality in the US Since the 1960s. NBER Working Paper: No. 23655.Google Scholar
Mundell, R. A. (1965) Growth, stability, and inflationary finance. Journal of Political Economy 73, 97–109.CrossRefGoogle Scholar
Nakajima, M. (2015) The redistributive consequences of monetary policy. Business Review Q2, 9–16.Google Scholar
Piketty, T. (2015) About capital in the twenty-first century. American Economic Review 105, 48–53.CrossRefGoogle Scholar
Romer, C. D. and Romer, D. H. (1998) Monetary policy and the well-being of the poor. In: Income Inequality: Issues and Policy Options, pp. 159–201. Kansas City: Fed. Reserve Bank Kansas.CrossRefGoogle Scholar
Sen, P., and Turnovsky, S. J. (1989) Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect. Journal of International Economics 26, 227–250.CrossRefGoogle Scholar
Slesnick, D. T. (1994) Consumption, needs and inequality. International Economic Review 35, 677–703.CrossRefGoogle Scholar
Smets, F. and Wouters, R. (2003) An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European Economic Association 1, 1123–1175.CrossRefGoogle Scholar
Tobin, J. (1965) Money and economic growth. Econometrica 33, 671–684.CrossRefGoogle Scholar
Townsend, R. M. (2008) Introduction to macroeconomic dynamics special issue: Inequality. Macroeconomic Dynamics 12, 149–153.CrossRefGoogle ScholarPubMed
Turnovsky, S. J. (2002) Knife-Edge conditions and the macrodynamics of small open economies. Macroeconomic Dynamics 6, 307–335.CrossRefGoogle Scholar
Turnovsky, S. J. (2015) Economic growth and inequality: The role of public investment. Journal of Economic Dynamics and Control 61, 204–221.CrossRefGoogle Scholar
Williamson, S. D. (2009) Transactions, credit, and central banking in a model of segmented markets. Review of Economic Dynamics 12, 344–362.CrossRefGoogle Scholar
Wolff, E. N. (2017) Household Wealth Trends in the United States, 1962 to 2016: Has Middle Class Wealth Recovered?” National Bureau of Economic Research Working Paper: No. 24085.Google Scholar