Are Inflationary Shocks Regressive? A Feasible Set Approach
We develop a framework to measure the welfare impact of inflationary shocks throughout the distribution. The first-order impact of a shock is summarized by the induced movements in agents' feasible sets: their budget constraint and borrowing constraints. To measure this impact, we combine estimated impulse response functions with micro-data on household consumption bundles, asset holdings and labor income for different US households. We find that inflationary oil shocks are regressive, but monetary expansions are progressive, and there is substantial heterogeneity throughout the life cycle. In both cases, the dominant channel is the effect of the shock on asset prices, not movements in goods prices or labor income.
Grigsby acknowledges financial support from Princeton University. Walsh acknowledges financial support from Columbia Business School and the National Science Foundation. The authors have no further sources of funding nor material or relevant financial relationships. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.