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- Title
Incomplete markets and the output-inflation tradeoff.
- Authors
Algan, Yann; Challe, Edouard; Ragot, Xavier
- Abstract
This paper analyses the effects of money shocks on macroeconomic aggregates in a tractable flexible-price, incomplete-markets environment that generates persistent wealth inequalities amongst agents. In this framework, current inflation redistribute wealth from the cash-rich employed to the cash-poor unemployed and induce the former to increase their labour supply in order to maintain their desired levels of consumption and precautionary savings. If the shocks are persistent, however, they also raise inflation expectations and thus deter the employed from saving and supplying labour. We relate the strength of these two inflation taxes to the underlying parameters of the model and study how they compete in determining the overall sign and slope of the implied 'output-inflation tradeoff' relation.
- Subjects
CONJOINT analysis; MARKETS; PRICE inflation; MACROECONOMICS; PRICE fluctuations; COMMERCIAL agents; CONSUMPTION (Economics); LABOR supply
- Publication
Economic Theory, 2011, Vol 46, Issue 1, p55
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-009-0499-0