Redistributive Effects of Inflation, Output and Unemployment
Alok Kumar  1@  
1 : University of Victoria [Canada]  (UVIC)  -  Site web
University of Victoria3800 Finnerty RoadVictoria BC V8P 5C2Canada -  Canada

Empirical evidence suggests that inflation has a positive effect on both output and unemployment in the long run in the United States.This paper develops a search-theoretic monetary model with heterogeneous agents in which a higher inflation rate increases both output and unemployment.The model has two key features: (i) separation between workers and employers and (ii) endogenous labor force participation. Changes in money supply redistributes consumption between employers and workers. This redistribution along with endogenous labor force participation creates a channel by which a higher inflation rate increases output, unemployment, and labor force participation. Though output rises, inflation acts as a regressive consumption tax. Consumption and welfare of workers fall. The Friedman rule does not maximize social welfare.

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