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Disinflation, Inequality and Welfare in a TANK Model

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  • Maria, Ferrara
  • Patrizio, Tirelli
Abstract
We investigate the redistributive and welfare effects of disinflation in a two-agent New Keynesian (TANK) model characterized by Limited Asset Market Participation (LAMP) and wealth inequality. We highlight two key mechanisms driving our long-run results: i) the cash in advance constraint on firms working capital (CIA); ii) dividends endogeneity. These two channels point in opposite directions. Lower inflation softens the CIA and, by raising labor demand, lowers inequality. But the disinflation also raises dividends and this increases inequality. The disinflation is always welfare-improving for asset holders. We obtain ambiguous results for non-asset holders, who suffer substantial consumption losses during the transition.

Suggested Citation

  • Maria, Ferrara & Patrizio, Tirelli, 2019. "Disinflation, Inequality and Welfare in a TANK Model," Working Papers 402, University of Milano-Bicocca, Department of Economics, revised Feb 2019.
    • Handle: RePEc:mib:wpaper:402
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    5. Hayo, Bernd, 2023. "Does the ECB's monetary policy affect personal finances and economic inequality? A household perspective from Germany," Economic Modelling, Elsevier, vol. 129(C).
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    More about this item

    Keywords

    Firms Pricing; Disinflation; Inequality; Welfare Economics;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • D3 - Microeconomics - - Distribution
    • D6 - Microeconomics - - Welfare Economics

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