Scott Joslin

This paper connects two highly concerning world problems today – inflation and widening inequality. It identifies a granular origin of widening inequality using two stages. First, low-income individuals are systematically exposed to higher cost of living relative to high-income individuals. Second, this "inflation gap" manifests in the gradual future widening gaps in the relative frequency of low-income individuals with (a) lower ownership of real estate, (b) higher credit card debt balances, (c) no health insurance, (d) poorer health conditions, (e) lower educational attainment, (f) higher real estate rental, as well as (g) higher frequency of property crimes. Using micro-level data, when available, we also document causal linkages between current inflation gaps and future widening inequality.

We propose a new class of no-arbitrage term structure models with stochastic volatility. This class of models allow for tractable pricing of bonds. We show how standard affine term structure models are unable to capture violations of the expectations hypothesis due to predictable forecast errors. In contrast, the almost-affine class is consistent with both historical variation in volatility and the observed violations of the expectation hypothesis.