The Uneven Welfare Costs of the Volcker Disinflation (R&R JPE-Macro)


We use a HANK model to quantify the distribution of welfare gains and losses of the US Volcker disinflation. In the long run households prefer low inflation, but the Volcker disinflation is characterized by sharp increases in the real interest rate and unemployment, as well as a redistribution from nominal borrowers to nominal savers. We calibrate the model to match the early 1980s high-inflation environment and examine the actual changes in the nominal interest rate and inflation over the Volcker disinflation. While aggregate welfare gains are positive, the effects are skewed and half of households prefer to avoid the disinflation.