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Role of cash and costs of inflation for different income groups in the U.S

Author

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  • Kakar, Venoo
  • Daniels, Gerald Eric

Abstract

Due to the adverse effects of the Great Recession, economic inequality has received much attention in the macroeconomic literature. While U.S. monetary policy set by the Federal Reserve does not seek to directly influence economic inequality by operating under the dual mandate, it has indirect consequences on economic inequality as well as important redistributional effects as transaction patterns and cash constraints are not evenly distributed for different income groups. We build a monetary growth model where money is introduced via a Cash-In-Advance (CIA) constraint. Our model successfully generates patterns of income, wealth, and earnings inequality in the U.S. and we use this framework to analyze the redistributional impact of long-run inflation. We observe significant redistributional effects as inflation acts as a regressive tax on consumption; it adversely affects households at the bottom of the income partition and benefits those at the top. This paper contributes to the recent and growing literature on the redistributive effects of monetary policy.

Suggested Citation

  • Kakar, Venoo & Daniels, Gerald Eric, 2019. "Role of cash and costs of inflation for different income groups in the U.S," Economic Modelling, Elsevier, vol. 80(C), pages 303-319.
  • Handle: RePEc:eee:ecmode:v:80:y:2019:i:c:p:303-319
    DOI: 10.1016/j.econmod.2018.11.016
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    Citations

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    Cited by:

    1. Geronikolaou, George & Spyromitros, Eleftherios & Tsintzos, Panagiotis, 2020. "Progressive taxation and human capital as determinants of inflation persistence," Economic Modelling, Elsevier, vol. 88(C), pages 82-97.
    2. Mehdi El Herradi & Jakob Haan & Aurélien Leroy, 2023. "Inflation and the Income Share of the Rich: Evidence for 14 OECD Countries," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 69(1), pages 170-194, March.
    3. Mehdi el Herradi & Jakob de Haan & Aurélien Leroy, 2020. "Inflation and the Income Share of the Rich: Evidence for 12 OECD Countries," CESifo Working Paper Series 8203, CESifo.
    4. Davtyan, Karen, 2023. "Unconventional monetary policy and economic inequality," Economic Modelling, Elsevier, vol. 126(C).
    5. Süssmuth, Bernd & Wieschemeyer, Matthias, 2022. "Taxation and the distributional impact of inflation: The U.S. post-war experience," Economic Modelling, Elsevier, vol. 111(C).

    More about this item

    Keywords

    Inflation; Monetary policy; Redistribution; Inequality; Ex-ante heterogeneity; Progressive taxation;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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