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Preference Heterogeneity, Inflation, and Welfare

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Abstract

This paper assesses the welfare implications of long-run inflation in an environment with essential money, a competing illiquid asset, and potential ex-ante heterogeneity of households with respect to their behavioral measures of risk aversion and elasticity of intertemporal substitution. The results show that the relative liquidity position of households’ portfolio as well as potential inter-cohort transfers of resources can deliver fewer welfare costs to inflation than has been previously reported, and in some instances net welfare benefits to low levels of positive inflation. These results hold in versions of the model calibrated to both US and euro area data.

Suggested Citation

  • Michael Patrick Curran & Scott J. Dressler, 2019. "Preference Heterogeneity, Inflation, and Welfare," Villanova School of Business Department of Economics and Statistics Working Paper Series 40, Villanova School of Business Department of Economics and Statistics.
    • Handle: RePEc:vil:papers:40
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    File URL: http://repec.library.villanova.edu/workingpapers/VSBEcon40.pdf
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    Cited by:

    1. Bagchi, Sutirtha & Curran, Michael & Fagerstrom, Matthew J., 2019. "Monetary growth and wealth inequality," Economics Letters, Elsevier, vol. 182(C), pages 23-25.
    2. Uras, Burak R. & van Buggenum, Hugo, 2022. "Preference heterogeneity and optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    3. Cecion, Martina & Coenen, Günter & Gerke, Rafael & Le Bihan, Hervé & Motto, Roberto & Aguilar, Pablo & Ajevskis, Viktors & Giesen, Sebastian & Albertazzi, Ugo & Gilbert, Niels & Al-Haschimi, Alexander, 2021. "The ECB’s price stability framework: past experience, and current and future challenges," Occasional Paper Series 269, European Central Bank.

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    More about this item

    Keywords

    Inflation; Welfare; Recursive Preferences;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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