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INFLATION AND INEQUALITY IN A GROWING ECONOMY WITH CASH AND CREDIT GOODS

Published online by Cambridge University Press:  07 September 2020

Juin-Jen Chang ,
Hsieh-Yu Lin ,
David W. Savitski  and
Hsueh-Fang Tsai
Juin-Jen Chang
Affiliation:
Academia Sinica
Hsieh-Yu Lin*
Affiliation:
Tunghai University
David W. Savitski
Affiliation:
I-Shou University
Hsueh-Fang Tsai
Affiliation:
Fu-Jen Catholic University
*
Address correspondence to: Hsieh-Yu Lin, Department of Economics, Tunghai University, Xitun, Taichung 40704, Taiwan, R.O.C. e-mail: [email protected]. Phone: 886-4-23590702.
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Abstract

We develop a dynamic general equilibrium growth model, where households purchase final goods on cash or credit and have different capital and money endowments, to investigate whether inflation affects trends in income and consumption inequality. We show that, under a strong substitutability between cash and credit goods, inflation has a negative relationship with income inequality, but a U-shaped relationship with consumption inequality. The divergence between income and consumption inequality explains several recent empirical observations. This result has important policy implications, as consumption inequality better reflects the welfare distribution whereas income inequality fails to capture consumption disparities resulting from different consumption and asset distributions across households. In the growth model with heterogeneous households, there is a mixed relationship between growth and income inequality, confirming the existence of the Kuznets curve. The inflation-driven asset reallocation might also produce a Mundell–Tobin effect, enhancing growth.

Keywords

Consumption and Asset ReallocationsIncome and Consumption InequalityInflationGrowth
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 3 , April 2022 , pp. 579 - 612
Copyright
© Cambridge University Press 2020

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Footnotes

We thank two anonymous referees, Ping Wang, Been-Lon Chen, and Ching-Chong Lai for their insightful comments on an earlier draft of this paper, whose inputs have led to a much improved paper. We are also grateful for financial support provided by the Ministry of Science and Technology, R.O.C. The usual disclaimer applies.

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