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Surprise by Anticipated Inflation

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  • Dila Asfuroglu

Abstract

This paper proposes a theoretical model with two types of households to explore the distributional effects of inflation, assess the non-neutrality of money; and in return, to provide a guideline for policymakers in setting inflation rate. An impatient borrower who faces a borrowing constraint holds a positive amount of debt in equilibrium while a patient lender engages in consumption smoothing. Hence, inflation affects net worth of borrowers via nominal debt by redistributing resources away from lender, rendering welfare gains for the borrower and losses for the lender; and the structure of borrowing constraint gives rise to non-neutrality of anticipated inflation. The utilitarian welfare gain from generating inflation in a cashless economy is amplified when heterogeneous productivity levels are assumed. Yet, incorporating money demand in the form of money-in-utility model suggests that an inflation tax as an additional distortion reverses the overall positive effect of generating inflation in the cashless economy. JEL Classifications: E31, E37, E41, E52, D63.

Suggested Citation

  • Dila Asfuroglu, 2024. "Surprise by Anticipated Inflation," SAGE Open, , vol. 14(2), pages 21582440241, May.
    • Handle: RePEc:sae:sagope:v:14:y:2024:i:2:p:21582440241245102
    DOI: 10.1177/21582440241245102
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    More about this item

    Keywords

    anticipated inflation; heterogeneous households; redistribution; welfare analysis;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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