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Liquidity, Capital Pledgeability and Inflation Redistribution

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Abstract

We study the redistributive effects of expected inflation in a microfounded monetary model with heterogeneous discount factors and collateral constraints. In equilibrium, this heterogeneity leads to borrowing and lending. Model assumptions also guarantee a tractable distribution of money and capital holdings. Several results emerge from our analysis. First, in this framework expected inflation is detrimental to capital accumulation. Second, expected inflation affects borrowing and lending when collateral constraints are present, thus also inducing redistributive effects through credit. Third, we find this channel to be regressive when we calibrate our model using US data. This is because the drop in borrowers’ capital caused by inflation is larger when capital is used as collateral.

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  • Paola Boel & Julian Diaz & Daria Finocchiaro, 2021. "Liquidity, Capital Pledgeability and Inflation Redistribution," Working Papers 21-26, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:93337
    DOI: 10.26509/frbc-wp-202126
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    More about this item

    Keywords

    money; heterogeneity; collateral constraints; welfare costs of inflation;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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