Intergenerational Transmission of Inflation Aversion: Theory and Evidence

This paper studies the transmission of preferences in an overlapping-generations model with heterogeneous mature agents characterized by different degrees of inflation aversion. We show how the dynamics of a society's degree of inflation aversion and the implied degree of central bank independence depend on the direction and speed of changes in the structure of the population's preferences, themselves a function of parent socialization efforts in response to observed inflation. We then construct a survey-based measure of inflation aversion and provide empirical support for our analytical and simulation results. Available cross-section evidence confirms that a nation's demographic structure, in particular variation in the share of retirees as a proxy for the more inflation-averse type, is a key determinant of inflation aversion, together with experience with past inflation and the resulting collective memory embodied in monetary institutions.