Distributional and Welfare Consequences of Disinflation in Emerging Economies

Distributional and Welfare Consequences of Disinflation in Emerging Economies

Title : Distributional and Welfare Consequences of Disinflation in Emerging Economies
Number : 13/34
Author(s) : Enes Sunel
Language : English
Date : August 2013
Abstract : This study investigates the distributional and welfare consequences of disinflation in emerging economies using a monetary model of a small open economy with uninsured idiosyncratic earnings risk. The model is calibrated to Turkish data and is used to compare stationary equilibria with quarterly inflation rates of 14.25% (for 1987:Q1-2002:Q4) and 2.25% (for 2003:Q1- 2010:Q2). Reduction in inflationary finance is assumed to affect lump-sum transfers, since government spending-to-GDP ratios have been roughly stable during disinflation in a number of emerging economies. Disinflation is found to lower aggregate welfare by 1.23% in terms of compensating consumption variation. This is because the reduction in the distortionary impediments of inflation on the poor falls short of the decline in their redistributive transfers income that is mainly financed by the rich. The shrinkage of cash transfers also tightens natural debt limits and increases the precautionary savings motive.
Keywords : Small open economy, incomplete markets, disinflation
JEL Codes : D31, F41, E52

 

Distributional and Welfare Consequences of Disinflation in Emerging Economies
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