Rich Retirees Big Losers, Young Homeowners Big Winners in Inflation Inflation is also a boon for the government and a tax on foreigners. December 19, 2006 – During periods of unexpected inflation it is the wealthiest of retirees that are the primary losers and the young, middle-class that are the big winners, reports a new study.
This study in the December issue of the Journal of Political Economy says that even mild inflation can lead to substantial redistribution of nominal assets from lenders to borrowers, specifically, the transfer of wealth from older, wealthier households to younger, middle-class households.
"Inflation affects all nominal asset positions, not just cash positions," write Matthias Doepke (University of California, Los Angeles and National Bureau of Economic Research) and Martin Schneider (Federal Reserve Bank of Minneapolis and New York University).
"As a result we find that even moderate inflation leads to substantial wealth redistribution."
The main winners are young, middle-class households with fixed-rate mortgage debt. They also have the largest ratios of net debt to net worth. Doepke and Schneider find that borrowing in the form of mortgage loans is what positions young, middle-class households to be the greatest beneficiaries in the event of inflation.
In contrast, old households in the top 10 percent of net worth keep a large part of their savings in long- term bonds.
In a scenario where inflation increased at five percentage points more than expected over the next decade, rich retirees would be hurt more – relative to net worth – than either the poor or the middle class, accounting for nearly 60 percent of total household-sector losses.
Besides transferring resources from the old to the young, Besides transferring resources from the old to the young, inflation is a boon for the government and a tax on foreigners.
Across sectors, inflation is also a tax on foreigners, the researchers find. Foreign holdings of U.S. nominal assets – that is, assets without any intrinsic value – surpassed that of domestic households in the early 2000s.
"Our results suggest that fiscal policy can play a central role in the shaping of the effects of an inflation episode," write the authors.
"Indeed, in all of our experiments the government is a major winner, which implies that fiscal policy has to adjust in some dimension to satisfy the government budget constraint."
Editor's Notes:
Financial support for this study was provided by the National Science Foundation and the Alfred P. Sloan Foundation.
JPE has been presenting significant research and scholarship in economic theory and practice since its inception in 1892. Publishing analytical, interpretive, and empirical studies, the Journal presents work in traditional areas--monetary theory, fiscal policy, labor economics, development, micro- and macroeconomic theory, international trade and finance, industrial organization, and social economics. For more information, visit: www.journals.uchicago.edu/JPE.
Doepke, Matthias and Martin Schneider. "Inflation and Redistribution of Nominal Wealth." Journal of Political Economy 114:6.
