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Inflation, Redistribution, and Real Activities

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Abstract

Empirical evidence suggests that inflation has positive effect on both output and unemployment in the long run in the United States. This paper develops a monetary model in which a higher inflation rate increases both output and unemployment. The model has two key features: (i) separation between workers and owners of firms (employers) and (ii) endogenous labor force participation. Changes in money supply redistributes consumption between employers and workers. This redistribution along with endogenous labor force participation creates a channel by which a higher inflation rate increases output, unemployment, and labor force participation. The Friedman rule does not maximize social welfare.

Suggested Citation

  • Alok Kumar, 2013. "Inflation, Redistribution, and Real Activities," Department Discussion Papers 1302, Department of Economics, University of Victoria.
    • Handle: RePEc:vic:vicddp:1302
    Note: ISSN 1914-2838
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    More about this item

    Keywords

    employers; workers; money creation; inflation; output; unemployment; labor force participation rate; welfare;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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

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