Unexpected Inflation

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Unexpected Inflation and Redistribution of Wealth in Canada
Césaire A. Meh, Canadian Economic Analysis, and Yaz Terajima, Financial Stability

One of the most important arguments in favour of price stability is that unexpected inflation generates changes in the distribution of income and wealth among different economic agents. These redistributions occur because many loans in the economy are specified in fixed-dollar terms. Unexpected inflation redistributes wealth from creditors to debtors by reducing the real value of nominal assets and liabilities. This article quantifies the redistributional effects of unexpected inflation in Canada. To this end, we first provide comprehensive evidence of the nominal assets and liabilities of various
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Hence, when inflation is high, the value of these assets and liabilities falls in terms of purchasing power, since the prices of other goods and services go up with inflation, but payments on these financial claims are fixed. The extent of the changes in the purchasing power of financial assets and liabilities also depends on the term to maturity, as we will show later on. In this section, we document Canadian holdings by type and maturity in various categories of assets and liabilities. Specifically, we look at asset and liability positions for three sectors: household, government, and non-residents.5 We also consider different groups of households. The objective is to show that, among these different groups of agents, holdings of nominal assets and liabilities differ in both qualitatively and quantitatively important ways. Given that these differences exist, there is potential for redistribution among them following inflation shocks.

(SFS). The NBSA documents the ownership of financial and non-financial assets and liabilities by sector. We use the NBSA to compute the net asset and liability positions of the household, government, and foreign sectors. The SFS is a household survey data set on income and wealth. We use the 2005 wave (the latest available), involving about 5,000 households, with weights to produce Canadian aggregates. It provides a comprehensive

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