Abstract:
Financial asset distributions display considerable inequality in emerging economies,
suggesting that the recent disinflation observed in these countries might entail asymmetric
welfare effects. This study uses a quantitative model with uninsurable idiosyncratic
risk to show that, in a version calibrated to the Turkish data, a gradual decline
of 12% in the quarterly inflation rate leads to an aggregate welfare gain of 0.40% in
consumption equivalent terms. Welfare gains of the poor fall short of the aggregate
gain, despite the financial portfolio of the poor is more vulnerable to inflation. This is
because the model-implied substantial inequality in cash holdings makes inflation tax
payments of the poor much smaller than that of the rich in absolute magnitudes. When
inflation tax revenues are assumed to finance redistributive transfers that provide insurance,
the dispersion among cross-sectional gains from disinflation widens further. If
country borrowing rates are assumed to decline during disinflation, real implications
are elevated via enhanced capital accumulation.