Welfare Consequences of Gradual Disinflation in Emerging Economies

Abstract

Emerging economies display considerable inequality in monetary asset holdings, rendering the recent disinflation nontrivial. Using a small openeconomy model with uninsurable idiosyncratic risk, this paper shows that a gradual decline of 12% in the quarterly inflation rate leads to an aggregate welfare gain of 0.40% in consumption equivalent terms. The poor gain less than the economy on aggregate, despite holding a more inflation-prone financial portfolio. This is because unequal cash holdings make inflation tax payments of the poor much smaller than those of the rich. When inflation tax revenues finance redistributive transfers that provide insurance, cross-sectional gains become even more dispersed.JEL codes: D31, E52, F41

Household heterogeneity and the transmission of foreign shocks

“…This result is reminiscent of our findings, however, her results are driven purely from the wage and CPI effects on the hand-to-mouth agents' consumption baskets and abstract from any effects of foreign debt and revaluation. Sunel (2018) studies the welfare effects of a gradual disinflation using a heterogeneous-agent open-economy model with a cash-in-advance friction. Unlike our framework, he does not con-sider foreign shocks, nor debt revaluation effects or nominal rigidities.…”

The Cost of Disinflation in a Small Open Economy Vis-À-Vis a Closed Economy

“…In line with the results of Ascari andRopele (2012a, 2013) the paper finds long-run welfare benefits of disinflation. The paper by Sunel (2018) computes the welfare consequences of the gradual but large disinflation in emerging economies that we have observed. In a small open economy model with uninsurable idiosyncratic risk, a gradual decline of 12 per cent in the quarterly inflation rate leads to an aggregate welfare benefit of 0.40 per cent in consumption equivalent terms.…”

GELİŞMEKTE OLAN ÜLKELERDE ENFLASYON VE ENFLASYON OYNAKLIĞI ARASINDAKİ İLİŞKİ ÜZERİNE İNCELEME / An Analysis of The Relationship Between Inflation And Inflation Volatility In Emerging Economies

“…Refah seviyelerini olumsuz anlamda etkileyebilen bu veriler arasındaki ilişkiyi incelemek, bu çerçevede önem taşımaktadır. Bahsedilen çalışmalar genelde gelişmiş ülkeler için enflasyonun refah etkilerini incelerken, Sunel (2018), gelişmekte olan ülkelerde enflasyon oranlarının düşmesinin refah seviyesini arttırdığını ortaya koymaktadır.…”