Disinflation, Inequality, and Welfare in a Tank Model

Tirelli, Patrizio; Ferrara, Maria

doi:10.1111/ecin.12870

Cited by 4 publications

(1 citation statement)

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“…Finally, borrowers and banks are harmed by the increase in the real interest rates on loans and deposits, respectively 16 . Therefore, di¤erent agents are a¤ected by the volatility of di¤erent variables: savers' and borrowers' welfare is mainly in ‡uenced by macroeconomic and …nancial variables ‡uctuations, respectively 17 ; instead, banks' welfare is a¤ected by both.…”

Section: Welfare Analysismentioning

confidence: 99%

Disinflation costs and macroprudential policies: real and welfare effects

Busato,

Ferrara,

Varlese

2023

JES

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PurposeThis paper analyzes real and welfare effects of a permanent change in inflation rate, focusing on macroprudential policy’ role and its interaction with monetary policy.Design/methodology/approachWhile investigating disinflation costs, the authors simulate a medium-scale dynamic general equilibrium model with borrowing constraints, credit frictions and macroprudential authority.FindingsProviding discussions on different policy scenarios in a context where still it is expected high inflation, there are three key contributions. First, when macroprudential authority actively operates to improve financial stability, losses caused by disinflation are limited. Second, a Taylor rule directly responding to financial variables might entail a trade-off between price and financial stability objectives, by increasing disinflation costs. Third, disinflation is welfare improving for savers, while costly for borrowers and banks. Indeed, while savers benefit from policies reducing price stickiness distortion, borrowers are worried about credit frictions, coming from collateral constraint.Practical implicationsThe paper suggests threefold policy implications: the macroprudential authority should actively intervene during a disinflation process to minimize costs and financial instability deriving from it; policymakers should implement a disinflationary policy stabilizing also output; the central bank and the macroprudential regulator should pursue financial and price stability goals, separately.Originality/valueThis paper is the first attempt to study effects of a permanent inflation target reduction in focusing on the macroprudential policy’ role.

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Section: Welfare Analysismentioning

confidence: 99%