Income Redistribution During a Disinflation and its Effect on the Disinflation Path

Abstract

It is often said that wage adjustment during a disinflation is sluggish because those who might initiate any downward movement fear a per- manent real income loss. Yet there remains little empirical work on this subject. This paper estimates the income redistribution among different sectors of society that results from a government disinflation policy. A model of wage setting in the U.S. economy is developed, then simulated for alternative money growth paths and private sector behavioral para- meters. It is found that a sudden change in monetary policy can cause a significant amount of income redistribution. A slow monetary deceleration may take slightly longer to achieve a disinflation, but there will be significantly less redistribution, greater price stability, and perhaps greater responsiveness of wage setting to monetary policy.