Abstract - Economics Research Reports


On Inflation as a Regressive Consumption Tax

By Andrés Erosa (University of Western Ontario) and Gustavo Ventura (University of Western Ontario)

March, 2000

Evidence on the portfolio holdings and transaction patterns of households suggests that the burden of inflation is not evenly distributed. We build a monetary growth model consistent with key features of cross-sectional household data and use this framework to study the distributional impact of inflation. At the aggregate level, our model economy behaves similarly to standard monetary growth models within the representative agent abstraction. Inflation has, however, important distributional effects since it is effectively a regressive consumption tax. Thus, neglecting the distributional consequences of inflation may prove misleading in assessing the effects of inflation in our economy.

JEL Classification: E31; D30
Keywords: inflation; heterogeneity; distribution