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Nominal Maturity Mismatch and the Liquidity Cost of Inflation

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Abstract

We document a liquidity channel through which unexpected inflation generates substantial welfare losses. Household balance sheets are nominal maturity mismatched: nominal liabilities have a longer duration than nominal assets. Due to this mismatch, losses from unexpected inflation are concentrated over short time horizons, while gains are spread out over the longer run. This has negative effects on liquidity-constrained households, who cannot easily borrow against their future gains. We quantify the importance of the liquidity channel and show that, for households in the lower half of the wealth distribution, the recent 2021–2022 unexpected inflation shock caused welfare losses valued at 0.5% of lifetime wealth: a monetary loss equal in size to 15% of current- year consumption. More than 75% of that loss is due to the liquidity channel, with the remainder coming from the more commonly studied wealth channel.

Suggested Citation

  • Yu-Ting Chiang & Ezra Karger, 2024. "Nominal Maturity Mismatch and the Liquidity Cost of Inflation," Working Papers 2024-031, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:98882
    DOI: 10.20955/wp.2024.031
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    More about this item

    Keywords

    inflation; household illiquidity; household balance sheet; nominal rigidity;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G5 - Financial Economics - - Household Finance

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