Date Added: Aug 2011
The author studies the effects of anticipated inflation on the macroeconomic performance and whether the fiscal policy regime matters for such effects. The author constructs a tractable framework with competitive search that can endogenously generate dispersion of prices, wealth and income. The author proves and characterizes the stationary equilibrium. Findings from quantitative analysis suggest that inflation has non-trivial effects on aggregate output, price levels, price dispersion, average wealth, and inequality of wealth, income and consumption. Income taxation has its distinctive effects on the above variables, often to the opposite of the inflation effects. Moreover, the tax regime can alter the relationship between inflation and wealth dispersion.