Research

This paper studies the welfare costs of anticipated inflation emphasizing a stark feature of the U.S. economy: around 60% of the U.S. households do not hold any interest-bearing liquid financial asset. This is particularly harmful in economic environments with high inflation rates that poses a threat to this large proportion of the U.S. households. In this paper, I explore the consequences of anticipated and persistent inflation and its unequal distribution across money holdings for this particular type of households. To do this, I develop a search-theoretic model of money where agents are ex-ante heterogeneous in their productivity level, and money serves two roles: as a medium of exchange and as an instrument for precautionary savings. The model generates a non-degenerate distribution of money in steady-state that matches the one observed in the data. This last point is crucial to assess the unequal costs of inflation across the money holdings distribution. The main result shows that welfare costs of inflation are higher than in the traditional money search models in the literature. Also, these costs are larger for higher income households whose saving capacity is particularly deteriorated, making it harder for them to hedge against income shocks. Finally, these results are sensitive to the way money is being injected into the economy: costs are higher when money is issued to finance government spending rather than via lump-sum transfers, which indicates strong distributive effects.

In recent years, macroeconomic models featuring heterogeneous agents, wealth inequality as well as the

nominal rigidities and other bells and whistles from the New Keynesian tradition, have become popular

in academic circles. Since Ayagari (1992) and Krussel and Smith (1998) solution methods and computer

power have improved, allowing for the analysis of increasingly more complex models. In

this paper we briefly summarize this thriving literature and perform some practical policy experiments

using different versions of the model. Throughout, we emphasize the distributional consequences of

resorting to different combinations of monetary and fiscal policy to bring inflation down.

The Fiscal Monitor looks at the possibility of fiscal policy contributing to disinflation while protecting

the vulnerable. The results indicate that when monetary policy acts alone or fiscal policies are not

adequately targeted, the poorest households bear the brunt of the costs of disinflation. Higher interest

rates are less costly for wealthier families as they have financial buffers and benefit from asset income.

Fiscal tightening with targeted transfers moderates interest rate increases and allows for smaller declines

in total private consumption (and no fall at all in the consumption of the poorest households).

There were three main macroeconomic policies implemented to cope with the Covid-19 crisis. First, there was a big increase in government transfers. Nearly 90% of the population received direct transfers from the government (IFE, ingreso familiar de emergencia). Second, the Central Bank implemented an aggressive expansionary monetary policy, taking its monetary policy rate quickly to the zero lower bound. Finally, the government allowed for pension funds withdraws. We develop a quantitative model of heterogeneous agents where Individuals differ in liquid wealth, illiquid wealth and productivity, to assess the effectiveness of these policies. Specifically, we ask three main questions:   How effective were these policies in stabilizing output?,    What is the effect of these policies on the resulting inequality? and  How do the effectiveness of these policies depend on the ex-ante observed inequality?