DISINF: The Distributional Consequences of Inflation

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It is often said that inflation is costly because it redistributes from some agents in the economy to others. Yet, this is rarely measured, and its consequences in models with rich heterogeneity remain under-explored. This grant will advance knowledge on the distributional consequences of inflation, adding to existing work that focuses on household inequality, new insights on redistribution within the financial sector, between non-financial firms, and between the private and public sectors. First, it will use detailed microdata from the financial sector to measure what is the exposure of different groups to inflation risk, which institutions sell and buy inflation risk, and how this affects the differential pass-through of inflation to nominal interest rates. These redistributions can cause costly financial crisis and are often behind financial repression measures. Second, it will use models of non-financial firms that are differentially exposed to inflation risk and are likely to have their operations impacted by unexpected shocks. The heterogeneous impact of inflation across firms generate a new source of costs of inflation, as they lead to distortions in the allocation of inputs and production that are amplified by price rigidity. Third, the composition and maturity of the public debt redistributes risk between current generations and future ones. Empirically, the extent to which the government shifts inflation risk between itself and the private economy varies considerably over time, and this affects the cyclicality of the tightness of the government budget constraint as well as the incentives to inflate away the debt. For the central bank, inflation has a differential effect on the attractiveness of banknotes, public digital currency, and private digital currency, and this is turn determines the seignorage revenue that central banks earn and so the financial constraints that monetary policy faces in the pursuit of stable inflation.