REAL INTEREST-RATES AND THE DISTRIBUTION EFFECTS OF UNANTICIPATED INFLATION

The effects on aggregate demand of redistributions of wealth due to unanticipated inflation are typically ignored by macroeconomists. This paper uses the overlapping generations model extended to three periods to show, under plausible assumptions, that an unanticipated increase in inflation results in a decline in aggregate demand. Further this implies that the ex ante real interest rate will decline in response to past unanticipated inflation. This prediction of the model provides an explanation of the results of empirical studies which find that nominal interest rates rise less than one-for-one with anticipated inflation. © 1990.