On Inflation, Wealth Inequality and Welfare in Emerging Economies

Abstract

Emerging economies that have a record of high inflation rates have been experiencing disinflation since mid 1990s. Using the monetary version of the Bewley-HuggettAiyagari model in a small open economy setup, we explore the distributional and welfare consequences of the recent disinflation. Stationary equilibria comparisons show that higher inflation is associated with higher inequality in the distributions of bonds and slightly lower inequality in the distributions of real balances and consumption. If the government rebates the seigniorage revenues as lump-sum transfers of equal size, a permanent reduction of quarterly inflation rate from 10% to 0% implies an aggregate welfare loss of 2.58% in consumption equivalent units. If the seigniorage revenues are used to finance wasteful fiscal expenditures, the same profile of disinflation implies an aggregate welfare gain of 1.42% in consumption equivalent units.

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Cite this paper

@inproceedings{Sunel2010OnIW, title={On Inflation, Wealth Inequality and Welfare in Emerging Economies}, author={Enes Sunel and Enrique G. Mendoza and Pablo DErasmo and John Shea and Carlos Vegh and Boragan Aruoba and Yasin Mimir and Temel Taskin and Ahmet Faruk Aysan}, year={2010} }