Liquidity, Capital Pledgeability and Inflation Redistribution

Paola Boel, Julian Diaz and Daria Finocchiaro

No 21-26, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We study the redistributive effects of expected inflation in a microfounded monetary model with heterogeneous discount factors and collateral constraints. In equilibrium, this heterogeneity leads to borrowing and lending. Model assumptions also guarantee a tractable distribution of money and capital holdings. Several results emerge from our analysis. First, in this framework expected inflation is detrimental to capital accumulation. Second, expected inflation affects borrowing and lending when collateral constraints are present, thus also inducing redistributive effects through credit. Third, we find this channel to be regressive when we calibrate our model using US data. This is because the drop in borrowers’ capital caused by inflation is larger when capital is used as collateral.

Keywords: money; heterogeneity; collateral constraints; welfare costs of inflation (search for similar items in EconPapers)
JEL-codes: E40 E50 (search for similar items in EconPapers)
Pages: 31
Date: 2021-11-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:93337

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DOI: 10.26509/frbc-wp-202126

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