Price Level and Inflation Dynamics in Heterogeneous Agent Economies / Greg Kaplan, Georgios Nikolakoudis, Giovanni L. Violante.

Format:

Book

Author/Creator:

Kaplan, Greg.

Contributor:

National Bureau of Economic Research.

Nikolakoudis, Georgios.

Violante, Giovanni L.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31433.

NBER working paper series no. w31433

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

We study equilibria in a heterogeneous-agent incomplete-market economy with nominal government debt and flexible prices. Unlike in representative agent economies, steady-state equilibria exist when the government runs persistent deficits, provided that the level of deficits is not too large. In these equilibria, the real interest rate is below the growth rate of the economy. We quantify the maximum sustainable deficit for the US and show that it is lower under more redistributive tax and transfer systems. With constant primary deficits, there exist two steady-states, and the price level and inflation are not uniquely determined. We describe alternative policy settings that deliver uniqueness. We conduct quantitative experiments to illustrate how redistribution and precautionary saving amplify price level increases in response to fiscal helicopter drops, deficit expansions, and loose monetary policy. We show that rising primary deficits can account for a decline in the long-run real interest rate, leading to higher inflation for any given monetary policy. Our work highlights the role of household heterogeneity and market incompleteness in determining inflation.

Notes:

Print version record

July 2023.