Journal Article
Demographics, redistribution, and optimal inflation
Abstract: The authors study the interaction among population demographics, the desire for intergenerational redistribution of resources in the economy, and the optimal inflation rate in a deterministic life cycle economy with capital. Young cohorts initially have no assets and wages are the main source of income; these cohorts prefer relatively low real interest rates, relatively high wages, and relatively high rates of inflation. Older cohorts work less and prefer higher rates of return from their savings, relatively low wages, and relatively low inflation. In the absence of intergenerational redistribution through lump-sum taxes and transfers, the constrained efficient competitive equilibrium requires optimal distortions on relative prices. The authors? model allows the social planner to use inflation/deflation to try to achieve the optimal distortions. In the model economy, changes in the population structure are interpreted as the ability of a particular cohort to influence the redistributive policy. When older cohorts have more influence on the redistributive policy, the economy has a relatively low steady-state level of capital and a relatively low steady-state rate of inflation. The opposite happens when young cohorts have more control of policy. These results suggest that aging population structures, such as those in Japan, may contribute to observed low rates of inflation or even deflation.
Keywords: Demography; Inflation (Finance);
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Bibliographic Information
Provider: Federal Reserve Bank of St. Louis
Part of Series: Review
Publication Date: 2012
Issue: Nov
Pages: 419-440