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Income Redistribution During a Disinflation and its Effect on the Disinflation Path

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  • Jesse M. Abraham

    (Data Resources Inc.)

Abstract

It is often said that wage adjustment during a disinflation is sluggish because those who might initiate any downward movement fear a per- manent real income loss. Yet there remains little empirical work on this subject. This paper estimates the income redistribution among different sectors of society that results from a government disinflation policy. A model of wage setting in the U.S. economy is developed, then simulated for alternative money growth paths and private sector behavioral para- meters. It is found that a sudden change in monetary policy can cause a significant amount of income redistribution. A slow monetary deceleration may take slightly longer to achieve a disinflation, but there will be significantly less redistribution, greater price stability, and perhaps greater responsiveness of wage setting to monetary policy.

Suggested Citation

  • Jesse M. Abraham, 1983. "Income Redistribution During a Disinflation and its Effect on the Disinflation Path," Working Papers 545, Princeton University, Department of Economics, Industrial Relations Section..
    • Handle: RePEc:pri:indrel:165
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