Incomplete Markets and the Output-Inflation Tradeoff
Ragot, Xavier; Challe, Edouard; Algan, Yann (2008), Incomplete Markets and the Output-Inflation Tradeoff, European Economic Association & Econometric Society : Parallel Meetings, 2008-08, Milan, Italie
TypeCommunication / Conférence
Conference titleEuropean Economic Association & Econometric Society : Parallel Meetings
MetadataShow full item record
Abstract (EN)This paper analyses the e¤ects of money shocks on macroeconomic aggregates within a flexible price, incomplete markets environment that generates persistent wealth inequalities amongst agents. In this framework, unexpected money shocks redistribute wealth from the cash-rich employed to the cash-poor unemployed and induce the former to increase labour supply in order to maintain their desired levels of consumption and precautionary savings. The reduced-form dynamics of the model is a textbook output-inflation tradeoff equation, whereby inflation shocks raise current output. The limiting impact of mean inflation and money growth persistence on this non neutrality mechanism are also examined.
Subjects / KeywordsIncomplete markets; borrowing constraints; short-run non-neutrality
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