Disinflation policy boosts liquidity and consumption, reduces income volatility.
The article explores how lowering inflation rates affects wealth distribution and consumption in an economy with incomplete markets. By creating a model with income risks and liquidity issues, the researchers found that reducing inflation leads to a redistribution of income between borrowers and lenders. This change in policy results in increased average real money holdings and consumption, while also reducing consumption volatility. Overall, disinflation policies can improve liquidity in the economy and help stabilize wealth and income over time.