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The Welfare Cost of Inflation Risk Under Imperfect Insurance

Author

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  • Olivier Allais

    (CORELA - Laboratoire de Recherche sur la Consommation - INRA - Institut National de la Recherche Agronomique)

  • Yann Algan

    (CORELA - Laboratoire de Recherche sur la Consommation - INRA - Institut National de la Recherche Agronomique)

  • Edouard Challe

    (CORELA - Laboratoire de Recherche sur la Consommation - INRA - Institut National de la Recherche Agronomique)

  • Xavier Ragot

    (CORELA - Laboratoire de Recherche sur la Consommation - INRA - Institut National de la Recherche Agronomique)

Abstract

What are the costs of inflation fluctuations and who bears those costs? In this paper, we investigate this question by means of a quantitative incomplete-market, heterogenous-agent model wherein households hold real and nominal assets and are subject to both idiosyncratic labor income shocks and aggregate inflation risk. A key feature of our analysis is a nonhomothetic specification for households' preferences towards money and consumption goods. Unlike traditional specifications, ours allows the model to reproduce the broad features of the distribution of monetary assets (in addition to being consistent with the distribution of nonmonetary assets). Inflation risk is found to generate significant welfare losses for most households, i.e., between 1 and 1.5 percent of permanent consumption. The loss is small or even negative for households at the very top of the productivity and/or wealth distribution.

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  • Olivier Allais & Yann Algan & Edouard Challe & Xavier Ragot, 2015. "The Welfare Cost of Inflation Risk Under Imperfect Insurance," Working Papers hal-01169656, HAL.
    • Handle: RePEc:hal:wpaper:hal-01169656
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01169656
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    Cited by:

    1. Curran, Michael & Dressler, Scott J., 2020. "Preferences, inflation, and welfare," European Economic Review, Elsevier, vol. 130(C).

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    More about this item

    Keywords

    Money-in-the-utility; Incomplete Markets; Inflation Risks; Welfare;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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