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On Inflation as a Regressive Consumption Tax

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Author Info
Andrés Erosa (The University of Western Ontario Department of Economics)
Gustavo Ventura (The University of Western Ontario Department of Economics)

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Abstract

Evidence on the portfolio holdings and transaction patterns of households suggests that the burden of inflation is not evenly distributed. We build a monetary growth model consistent with key features of cross- sectional household data and use this framework to study the distributional impact of inflation. At the aggregate level, our model economy behaves similarly to standard monetary growth models within the representative agent abstraction. Inflation has, however, important distributional effects since it is effectively a regressive consumption tax. Thus, neglecting the distributional consequences of inflation may prove misleading in assessing the effects of inflation in our economy.

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Paper provided by University of Western Ontario, Department of Economics in its series UWO Department of Economics Working Papers with number 20001.

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Date of creation: Mar 2000
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Handle: RePEc:uwo:uwowop:20001

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Postal: Department of Economics, Reference Centre, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
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  1. Ayse Imrohoroglu & Edward C. Prescott, 1991. "Evaluating the welfare effects of alternative monetary arrangements," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-10. [Downloadable!]
  2. Christina D. Romer & David H. Romer, 1998. "Monetary policy and the well-being of the poor," Proceedings, Federal Reserve Bank of Kansas City, pages 159-201. [Downloadable!]
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  3. Gillman, Max, 1993. "The welfare cost of inflation in a cash-in-advance economy with costly credit," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 97-115, February. [Downloadable!] (restricted)
  4. Casey B. Mulligan & Xavier Sala-i-Martin, 2000. "Extensive Margins and the Demand for Money at Low Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 961-991, October. [Downloadable!] (restricted)
  5. Schreft, S L, 1992. "Transaction Costs and the Use of Cash and Credit," Economic Theory, Springer, vol. 2(2), pages 283-96, April.
  6. Harold L. Cole & Alan C. Stockman, 1988. "Specialization, Transactions Technologies, and Money Growth," NBER Working Papers 2724, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Kessler, Denis & Wolff, Edward N, 1991. "A Comparative Analysis of Household Wealth Patterns in France and the United States," Review of Income and Wealth, Blackwell Publishing, vol. 37(3), pages 249-66, September.
  8. Thomas F. Cooley & Gary D. Hansen, 1991. "The welfare costs of moderate inflations," Proceedings, Federal Reserve Bank of Cleveland, pages 483-518.
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  9. Sprenkle, Case M, 1993. "The Case of the Missing Currency," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 175-84, Fall. [Downloadable!] (restricted)
  10. Arthur B. Kennickell & Martha Starr-McCluer & Annika E. Sunden, 1997. "Family finances in the U.S.: recent evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-24. [Downloadable!]
  11. Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 29-47, February. [Downloadable!] (restricted)
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