Unexpected Inflation

out of the blue(predicate) In? ation and Redistri nonwithstandingion of wealthiness in Canada Cesaire A. Meh, Canadian Economic Analysis, and Yaz Terajima, Financial Stability angiotensin converting enzyme of the nigh important arguments in favour of price stability is that unheralded in? ation generates changes in the distri b belyion of in make out and wealth among diametrical economic constituents. These re dispersions lapse beca us maturate many an separate(pre token(a)) loans in the economy ar speci? ed in ? xed-dollar ground. out of the blue(predicate) in? ation redistributes wealth from creditors to debtors by reducing the accepted measure of tokenish jibemations and liabilities. This member quanti? es the redistributional ca drop of unexpected in? ation in Canada.To this end, we ? rst go out either-encompassing evidence of the token(a) phrase assets and liabilities of various economic orbits and category separates. We ? nd that the redistributional cause of unexpected in? ation ar large eve for chronological successions of meek in? ation. The main winners be young, middleincome ho exampleh ageds, who argon major h olders of ? xed-rate owe debt, and the political sympathies, since in? ation reduces the real burden of their debt for both groups. The losers are high-income kinspersons and middle- shape upd, middle-income households that hold long-run bonds and nonindexed every(pre nominal phrase)owance wealth. T here is ongoing look into on potential re? ements to m unmatchabletary policy regimes in countries with low and stable in? ation. In Canada, for example, a systematic review of the ongoing in? ationtargeting framework is current (see the some other articles in this issue). An issue that has received relatively less forethought is the redistributional effects of unexpected in? ation. 1 Redistributional effects occur because many savings, investments, and loans in the economy are speci? ed in m peerlessy name (i. e. , not ad only ifed for in? ation) unexpected in? ation therefore redistributes wealth from lenders to borrowers by lowering the real measure out of tokenish assets and liabilities. The analysis of these effects may be important since the welfare costs of in? ation play not only on aggregate effects but alike on potential redistributional consequences. Our calculations utter that, even with an episode of low in? ation, the redistribution can be sizable. While this is a wealth transfer from unmatched agent in the economy to another, a sense of who wins and who loses is essential in tramp to assess transitional costs and potential public reassert for reform. The goal of this article is to run insight into the redistributional effects of in? tion in Canada. The article is a summary of the re centime research of Meh and Terajima (2008). 3 The article proceeds as follows. The ? rst section documents nominal assets and liabilities (i. e. , ? nancial assets and lia bilities that are denominated in Canadian dollars and not liberaly indexed to in? ation) held by different economic firmaments and 1 2 . 3 In this article, we focus on in? ation that is each unexpected or partially unexpected. If in? ation were completely expected, the change in the real value of the nominal usurp would be incorporated in the contract.Hence, there would not be any redistribution. On the other hand, lower-than-expected in? ation redistributes wealth from borrowers to lenders. Meh and Terajima (2008) build on Doepke and Schneider (2006) who document nominal assets and liabilities in the unite States and develop a methodology to compute the redistribution of wealth ca prevail by in? ation. UNEXPECTED INFLATION AND REDISTRIBUTION OF riches IN CANADA situate OF CANADA surveil barrage 2009 43 household groups, while the second part describes the methodology used to compute the redistribution of wealth bring on by unexpected in? ation.Using this methodology a nd the documented nominal purviews, the third section quantitatively assesses the redistribution of wealth on a lower floor episodes of low and moderate in? ation. The ? nal part of the article concludes. Nominal Assets and Liabilities Unexpected in? ation generates redistributions because most ? nancial assets and liabilities are speci? ed in m maviny mo crystaliseary value. For example, payments on ? xedrate owe contracts, bank deposits, non-indexed de? ned-bene? t indemnity plans,4 politics and corporate bonds, and other types of loans are mostly not determineed for unexpected in? ation.Hence, when in? ation is high, the value of these assets and liabilities falls in equipment casualty of purchasing force, since the prices of other goods and service go up with in? ation, but payments on these ? nancial birdcalls are ? xed. The expiration of the changes in the purchasing power of ? nancial assets and liabilities as tumefy as depends on the term to due date date, a s we go forth show later on. In this section, we document Canadian holdings by type and due date in various categories of assets and liabilities. Speci? cally, we look at asset and liability positions for triple arenas household, governance, and non-residents. 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 followe in? ation scandalises. (SFS). The NBSA documents the self-control of ? nancial and non-? nancial assets and liabilities by sector. We use the NBSA to compute the unclutter asset and liability positions of the household, government, and immaterial sectors.The SFS is a household lot data set on income and wealth. We use the 2005 wave (the latest available), involving near 5,000 households, with clogs to produce Canadian aggregates. It provides a comprehensive picture of assets and liabilities. For the sake of consistency, we use the 2005 NBSA and focus our analyses on the form 2005. Categories of nominal assets and liabilities Followe Doepke and Schneider (2006), nominal assets and liabilities are de? ned as all ? nancial grabs that are denominated in Canadian dollars and not fully indexed to in? ation.We report lowestwork nominal positions (i. e. , assets minus liabilities) in four categories, de? ned as follows6 short ? nancial assets and liabilities with a term to maturity less than or equal to one year (e. g. , domestic currency, bank deposits, consumer credit, and short-run paper) Mortgages all mortgage reserve ins Bonds non-mortgage and non-pension nominal claims with maturity great than one year, including government and corporate bonds and bank loans Pensions employer pension plans without comestible for indexing bene? ts to the cost of living, including both de? ed-contribution plans and non-indexed de? ned-bene? t plans7 We distinguish among these categories because they differ in maturity structure. Differences in maturity ordain emerge as a key factor in assessing the extent of potential redistribution. Unexpected in? ation generates redistributions because most ? nancial assets and liabilities are speci? ed in money terms. Sectoral positions Data We use two main data sets, both provided by Statistics Canada the National ease Sheet Accounts (NBSA) and the Survey of Financial Security 4 5 Non-indexed de? ned-bene? pension plans are those where retirees receive ? xed payments not change for in? ation. Since all communication channeles are owned by their shareholders, we allocate business sector portfolios across the terce sectors, establish on each sectors equity holdings. confuse 1 shows net positions in each category, as well as the boilers suit net nominal position (NNP) for each sector. Positions are denotative relat ive to gross domestic product (gross domestic product) in 2005. Positive song indicate net bring negative numbers, net espousal. 6 7 For more details, see Meh and Terajima (2008). Another type of plan is the indexed de? ed-bene? t plan. These plans are treated as real assets, since in? ation will not involve them. 44 UNEXPECTED INFLATION AND REDISTRIBUTION OF wealth IN CANADA rely OF CANADA retread resound 2009 We observe that households are the main net nominal lenders overall, with NNP at 40. 14 per cent of gross domestic product. The government sector, at about 43 per cent of GDP, is the main counterparty acceptance from households. The foreign sector has a positive but small NNP of 2. 85 per cent of GDP. Households tend to lend through and through short-term claims, bonds, and pensions, and borrow through mortgages.The government sector borrows mainly through bonds it also borrows through short-term claims and pensions. 8 The non-resident sector lends in mortgages and bo nds and owes in pensions. 9 These observations suggest that households are the potential losers of unexpected in? ation, since it lowers the purchasing power of their lending (i. e. , savings). Table 1 Net Nominal Positions as a piece of GDP Sectors Short-term claims Mortgages Bonds Pensions NNP Households 12. 25 -11. 94 22. 14 17. 69 40. 14 disposal -7. 60 3. 19 -29. 67 -8. 91 -42. 99 Non-residents -4. 65 8. 75 7. 53 -8. 79 2. 85Table 2 Nominal Positions as a Percentage of Net Worth by mature Age age group at a lower place 36 3645 Short-term claims Mortgages Bonds Pensions NNP 4. 83 -37. 95 -2. 63 -0. 05 -35. 80 -1. 01 -13. 57 4. 70 -1. 31 -11. 19 4655 1. 48 0. 07 6. 50 5. 01 13. 06 5665 2. 40 4. 48 7. 90 7. 36 22. 14 6675 9. 00 3. 55 6. 70 8. 68 27. 93 Over 75 12. 27 3. 29 7. 68 8. 65 31. 89 Household groups We now look at the household sector in more detail, using the SFS data set. We get wind three single outes (low-income, middle-income, and high-income) and six age grou ps ( below 36, 3645, 4655, 5665, 6675, and over 75) to observe differences within the sector. 0 Table 2 presents the overall positions for each age group as a circumstances of the groups net worth. We observe that the NNP increases with age, implying that households shift from being net borrowers to net lenders as they get older. Most of the borrowing of the young is from mortgages. With age, more lending (i. e. , saving) is observed in pensions and in liquid short-term claims. This implies that young households will cumulate from unexpected in? ation while older households will lose. Qualitatively, these patterns generally hold across different income classes, although with different magnitudes.Table 3 shows the positions of the three income classes, with the long-term category combining mortgages, bonds, and pensions. 11 The general pattern of borrowing more when young and lending more with age holds across different income classes. We observe, however, that levels of borrowing relative to their net worth among young middle-income and low-income households are relatively big than they are for high-income households, mainly because the portfolios of low-income and middle-income households are concentrated in residential real estate (mortgages). This implies that while the young generally bene? from in? ation, bene? ts are likely concentrated among low-income and middleincome households. Table 3 Nominal Positions as a Percentage of Net Worth by Age and Income Class Age Cohort infra 36 3645 High-income Short-term claims Long-term claims Medium-income Short-term claims 5. 83 2. 24 -28. 71 4. 39 7. 01 5. 49 20. 55 9. 07 20. 29 14. 91 18. 97 3. 86 -6. 52 -3. 73 5. 89 -1. 97 18. 40 -2. 36 19. 89 8. 48 19. 03 8. 56 21. 26 4655 5665 6675 Over 75 Long-term claims -95. 27 Low-income Short-term claims 18. 90 Long-term claims -71. 01 -0. 06 -27. 07 5. 04 -8. 30 13. 84 6. 89 12. 58 1. 7 10. 96 12. 79 8 The government sector is a borrower in pensions as it holds liabi lities from employer pension plans to its employees. 9 The borrowing in pensions by the non-resident sector indirectly re? ects the pension liabilities of the business sector. As previously mentioned, we allocate business sector portfolios across the three sectors, based on each sectors equity holdings. 10 The classes are de? ned based on a mix of income and wealth. For simplicity, we use the terms low-income, middle-income, and high-income to refer to each class. jaw Meh and Terajima (2008) for the details. 1 The distribution of households as well as that of net worth by age group and income class is shown in Meh and Terajima (2008). UNEXPECTED INFLATION AND REDISTRIBUTION OF WEALTH IN CANADA BANK OF CANADA REVIEW SPRING 2009 45 How In? ation Causes Redistribution Given the observed differences in nominal positions among households, government, and non-residents, unexpected in? ation should induce redistributions of real wealth. But how do we capture to identify the pattern and q uantify the extent of the redistributions? The size of wealth redistribution depends on how economic agents coiffure their expectations to in? tion surprises. We follow Doepke and Schneider (2006) by considering two scenarios that provide top(prenominal) and lower bounds on the redistribution of wealth. The upper bound is captured by a full-surprise scenario (hereafter FS). In this scenario, during several years of experiencing in? ation jolts, agents do not anticipate that shocks will continue in subsequent stoppages nominal come to rates remain unchanged and the in? ation shock lowers the real value of nominal positions each period, regardless of the duration of these positions. Wealth redistribution from in? tion The goal of this section is to use the nominal positions documented above, combined with the methodology just draw, to estimate the redistribution of wealth for an in? ation episode. Historically, in? ation episodes with different magnitudes lasting for broad peri ods ca-ca occurred. For example, between 2000 and 2004, the average in? ation rate in Canada was generally higher than the in? ation target rate of two per cent. To illustrate the in? ation-induced redistribution of wealth, we will consider a hypothetical in? ation episode that lasts ? e years with an in? ation shock of one per cent, starting in the bench mark year 2005. 12 Redistribution across sectors Table 4 summarizes the sectoral present-value gains and losses induced by an in? ation episode with one per cent shocks that continue for ? ve years, lineage in 2005, down the stairs the FS and IA in? ation scenarios. Table 4 Redistribution of Wealth across Sectors as a Percentage of GDP, with a One Per Cent In? ation Shock perdurable Five Years Households Sectors Net Full-surprise scenario -1. 95 -1. 26 Gains 12. 53 7. 61 Losses -14. 48 -8. 86 2. 09 1. 49 -0. 14 -0. 3 Government Non-residents The size of wealth redistribution depends on how economic agents adjust their expectat ions to in? ation surprises. The lower bound is abandoned by an indexing ASAP scenario (hereafter IA), where agents adjust their expectations after the sign shock to take into account the full duration of the shock. This scenario is also known as a gradual in? ation episode, since in? ation is partially anticipated. Under the IA scenario, the nominal yield curve is adjusted upwards to incorporate the in? ation shock. As a result, down the stairs the IA scenario, in? tion-induced gains or losses depend on the maturity of the nominal position. The position is locked-in at the pre-shock nominal interest rate until its maturity date but must be discounted using the new nominal rate, resulting in a lower present value. Intuitively, present-value gains or losses for a claim are larger on a lower floor the FS scenario because all the positions are affected equally by the in? ation episode. Under the IA scenario, however, long-term positions are affected more drastically than shorter po sitions. Agents are able to mitigate their losses on instruments that mature forrader the in? tion episode ends. Our calculations are based on a present-value analysis, described in Box 1. Box 2 discusses how we assign terms to maturity for each category of claims. Indexing ASAP scenario It is apparent from the table that, downstairs the two scenarios, the household sector loses, while the government sector wins. The household sector loss and the government gain are both large. Under FS, the household losses amount to 1. 95 per cent of GDP (or $26. 8 billion), while the government gain is 2. 09 per cent (roughly 5 per cent of NNP). The non-resident sector loses, but the loss is small, just 0. 4 per cent of GDP. To understand these ? ndings, unsay that, under FS, gains and losses are directly proportional to the sign nominal positions. Since the household sector is the economys main lender and the government sector is the main borrower, it is not surprising that these sectors are the most dramatically affected by the shock under the FS scenario. 12 Under the current in? ation-targeting framework, in? ation has not exceeded expectations by one per cent for ? ve square years. However, as a hypothetical scenario, we suppose price-level shocks that push in? tion to the upper bound of the range speci? ed in the current framework. The current yearly in? ation target is two per cent with the target range extending from one to three per cent. 46 UNEXPECTED INFLATION AND REDISTRIBUTION OF WEALTH IN CANADA BANK OF CANADA REVIEW SPRING 2009 Box 1 Present-Value Analysis of Redistributions1 Full-surprise (FS) Scenario We start with an business relationship of how unexpected in? ation changes the purchasing power of a nominal claim. intend an -year, zero-coupon bond with a total nominal yield at meter of . In the absence of unexpected in? tion, the present value of one dollar earned in periods through investment in this ? nancial claim is given by are then summed ove r all claims to generalise the net redistribution. Indexing ASAP Scenario The indexing ASAP scenario corresponds to a sometime(prenominal) promulgation at period that, starting from the current period , in? ation will be percent higher than expected during each period for the next periods. Assuming that the announcement is credible, bond markets will immediately alteration their in? ation expectations and incorporate these updates into the nominal yield curve.Assuming that the real curve does not change after the shock and that the Fisher equation holds, the new nominal interest rate used to discount . Therefore, the present a claim is value, , of a claim under IA is , where indicates the exponential function to base . recollect that at time , there is a one-time surprise increase in in? ation of per cent per year that lasts for periods. Under the FS scenario, since the in? ation shock in each subsequent period is unanticipated, market expectations do not adjust and the nominal term structure is unchanged.As a result, only a proportion, , of a positions present value remains, and this proportion falls as the size and duration of the shock increase. The present value of , is thus given by this nominal claim under FS, This equation shows that the present value of a onedollar claim at time is fencesitter of the term to maturity of that claim. The present-value gain or loss, , is given by As can be seen from this equation, in contrast to the FS scenario, under IA, a ? nancial position of maturity will be affected only for the periods of its duration, before which the agent is assumed to reinvest at the pre-shock real yield.This is analogous to the agents reinvesting in a claim that offers a nominal rate of return that has been indexed to take the in? ation announcement into account. The present-value gain or loss of a claim of maturity under IA is given by The net present value of gain or loss depends only on the size and duration of the shock and the initia l nominal position. The gain is, indeed, proportional to the . pre-shock position, with a coef? cient of If , then there is a gain from the in? ation episode otherwise, there is a loss. In order to derive the total gain or loss of an economic agent (e. g. , a sector r a household), is calculated for each claim with a term to maturity . The gains or losses 1 This methodology to calculate redistribution can be applied to compare the size of redistribution under different monetary policy regimes such as in? ation targeting and price-level targeting. This take is summarized in Crawford, Meh, and Terajima (this issue) and analyzed in detail in Meh, Rios-Rull, and Terajima (2008). Hence, under IA, the present-value gain or loss depends on (i) the size of the shock ( ), (ii) the duration of the shock ( ), (iii) the initial nominal position , and (iv) the maturity of the claim ( ).On the other hand, as mentioned above, the gain or loss under the FS scenario for any position is independent of its maturity. The IA scenario provides a lower bound for gain or loss on a claim, since it assumes full adjustment of expectations to the path of in? ation following the initial announcement. The total gain or loss of an economic agent is derived in the same way as in the FS scenario, based on the sum of the gains and losses from each claim. UNEXPECTED INFLATION AND REDISTRIBUTION OF WEALTH IN CANADA BANK OF CANADA REVIEW SPRING 2009 47 Box 2 bourne-to-Maturity StructureIn this box, we describe how terms to maturity are determined for each claim. For ? nancial short-term claims, we assume that they all have one-year terms to maturity, such that we set = 1. For mortgages, we apply the distribution of ? xed-rate mortgages by term in 2005. 1 The distribution is obtained using the Canadian Financial Monitor data set from Ipsos Reid Canada, which is compiled from a household survey containing detailed mortgage information. Chart A presents the distribution of mortgages across terms o f mortgages, weighted by outstanding balances. It shows that the most common term of Canadian ? ed-rate mortgages is ? ve years. Based on the fractions we obtain from Chart A, we assign a weight for each . For example, we assign a 60 per cent weight to . We take a similar approach for bonds. We derive a maturity distribution from rearly data on the maturity and face value of federal official government debt. 2 Chart B shows the distribution from the fourth quarter of 2005. We assume that the distribution of terms to maturity for federal government bonds approximates that for all instruments in this category. For pensions, we focus on two types of pension plans de? ned-contribution and non-indexed de? ned-bene? t plans.For de? ned-contribution plans, we assume that the average investment portfolio is approximated by the holdings of Trusteed Pension Plans. 3 The assets of Trusteed Pension Plans are given in the NBSA. We compute the distributions of these assets over terms to maturity and use them to assign weights to each value. For non-indexed de? ned-bene? t plans, we assume a ? xed stream of annual post-retirement payments. When calculating the present-value 1 The term of mortgage is the length of the current mortgage agreement. A mortgage can have a long amortization period, such as 30 years, with a shorter term, such as 5 years.When the term expires, a new term agreement can beget at the prevailing interest rate. The term of mortgage, rather than the amortization period, is pertinent for our analysis. These data were obtained from the depone of Canadas Communication, Auction and Reporting System database. See Meh and Terajima (2008) for more details. Trusteed Pension Plans hold approximately 7075 per cent of employer pension plan assets. See Meh and Terajima (2008) for more details. gains and losses of pension assets, we apply the formulas in Box 1 to each payment, then sum all the gains or losses.In assigning the term to maturity of each payment, we s et based on the difference between the current age of the household and the age at the time of the payment. Chart A Distribution of Fixed-Rate Mortgages by Term % 70 60 50 40 30 20 10 0 Six months One year Two years triple to four years Five years Seven years 10 or more years Chart B Distribution of Government Bonds by Term to Maturity % 15 10 5 0 1 yr. 10 yr. 20 yr. 30 yr. 2 3 48 UNEXPECTED INFLATION AND REDISTRIBUTION OF WEALTH IN CANADA BANK OF CANADA REVIEW SPRING 2009 It is also clear that gains and losses are generally smaller under IA.The household sector loss under IA is 1. 26 per cent of GDP (or $17. 3 billion), compared with 1. 95 per cent under FS. This change is driven by a reduction in the losses associated with the sectors net savings in long-term bonds and pensions relative to the FS case. The change is offset somewhat, since instruments with a shorter maturity are less sensitive to gradual in? ation, and the gains associated with the sectors net debt in mortgage ma rkets shrink relative to the FS case. The government gain drops from about 2. 1 per cent of GDP under the FS scenario to about 1. 5 per cent under the IA scenarioi. . , it shrinks by almost one-third. This occurs because the government borrows through some bonds that have maturities of less than ? ve years. The non-resident sectors losses, although small, increase from 0. 14 per cent of GDP under FS to 0. 23 per cent of GDP under IA. Finally, Table 4 shows gross redistributions for the household sectori. e. , it distinguishes between losses associated with lending and gains associated with borrowing. It should be clear from these results that net calculations substantially understate how more wealth is shifted around. Under FS, the household sector gains 12. 3 per cent of GDP and loses 14. 48 per cent, implying a total gross redistribution of 27. 01 per cent of GDP. In other words, household wealth worth 27 per cent of GDP is reshuf? ed. Under IA, the total gross redistribution is 16. 47 per cent of GDP. Table 5 Redistribution of Wealth across Households as a Percentage of Net Worth by Age and Income Class, with a One Per Cent In? ation Shock Lasting Five Years Age group Under 36 Full-surprise scenario all told High-income Middle-income Low-income Indexing ASAP scenario All High-income Middle-income Low-income 1. 66 0. 26 3. 91 2. 66 0. 44 -0. 18 1. 15 1. 15 -0. 54 -0. 74 -0. 3 0. 28 -0. 84 -0. 76 -0. 94 -0. 42 -0. 83 -0. 82 -0. 89 -0. 17 -0. 82 -0. 86 -0. 81 -0. 56 -0. 34 -0. 55 -0. 19 0. 14 1. 74 0. 13 4. 34 2. 53 0. 54 -0. 10 1. 28 1. 32 -0. 63 -0. 80 -0. 55 0. 16 -1. 07 -0. 85 -1. 26 -1. 01 -1. 36 -1. 34 -1. 42 -0. 69 -1. 55 -1. 45 -1. 64 -1. 15 -0. 53 -0. 68 -0. 42 -0. 16 3645 4655 5665 6675 Over 75 All Redistribution between household types Even though the household sector as a solid loses from surprise in? ation, the loss (or gain) is not uniform across different types of households. For different groups of households, we calculate the redistribution of wealth induced by the in? tion episode described above. Table 5 reports the present-value gains and losses as a percentage of the average net worth of each group for FS and IA. Overall, with respect to age categories, young households bene? t from in? ation and older households lose. On the income dimension, the right tower of the table indicates that high-income households lose the most and the loss declines as income becomes lower. Speci? cally, the main winners are young, middleincome households with large, ? xed-rate mortgage debts. Their gain as a proportion of mean net worth is large 4. 34 per cent under FS and 3. 1 per cent under IA. The second group of winners is the young, lowincome group, who enjoy, on average, gains between 2. 53 per cent and 2. 66 per cent of their average net worth. The gains of the young low-income group come largely from their holdings of student loans and mortgage debt. Note that this group actually experiences greater gains under IA. As in the c ase for the non-resident sector, this occurs when there is a maturity mismatch. to a greater extent speci? cally, while the gains associated with their net borrowing positions in bonds and mortgages do not vary much between in? tion scenarios, the losses associated with their savings in short-term instruments are mitigated under IA, since these claims mature before the shock has ended. The main winners are young, middleincome households with large, ? xed-rate mortgage debts. More age groups among low-income housholds bene? t from the in? ation episode than those among the middle class or the high-income under FS. This is because low-income households remain net borrowers through to age 56, and therefore the youngest three groups among the low-income are winners. In general, older middle- and high-income households bear most of the losses under the two in? tion scenarios. More speci? cally, under the FS scenario, high- and middle-income households over age 75 are the sectors greatest losers, with losses accounting for 1. 45 per cent and 1. 64 per cent, various(prenominal)ly, of their respective average net worth. These losses are UNEXPECTED INFLATION AND REDISTRIBUTION OF WEALTH IN CANADA BANK OF CANADA REVIEW SPRING 2009 49 mainly owing to their large positions in bonds and non-indexed de? ned-bene? t pensions. Table 5 also shows that most high-income households lose from the in? ation episode. Older middle- and high-income households bear most of the losses . . owing to their large positions in bonds and non-indexed de? ned-bene? t pensions. Conclusion In this article, we quantify the redistributional effects of unexpected in? ation in Canada. To this end, we ? rst provide comprehensive evidence of the nominal assets and liabilities of various economic sectors and household groups. We then conduct experiments examining the redistributional consequences of various in? ation episodes. The key ? nding is that the redistributional effects of unexpected in? ation are large even for episodes of low in? ation. For example, during an episode of low in? tion, where in? ation is one per cent above expectations for ? ve consecutive years, the loss of wealth among the household sector as a whole could amount to the equivalent of two per cent of GDP, or $27 billion. Among the main winners are young, middle-income households, who are major holders of ? xed-rate mortgage debt, and the government, since in? ation reduces the real burden of their debts. The losers are a combination of highincome households middle-aged, middle-income households and old households, who hold long-term bonds and non-indexed pension wealth.Non-indexed pension assets play an important percentage in the losses of old households. A natural question arising from these results is whether these redistributions have implications for the aggregate economy and welfare. These issues are analyzed in recent research by Meh, Rios-Rull, and Terajima (2008), whose ? ndings are also summa rized in Crawford, Meh, and Terajima (this issue). Literature Cited Crawford, A. , C. A. Meh, and Y. Terajima. 2009. Price-Level Uncertainty, Price-Level Targeting, and Nominal Debt Contracts. wedge of Canada Review, (Spring) 31-41. Doepke, M. nd M. Schneider. 2006. In? ation and the Redistribution of Nominal Wealth. Journal of Political Economy 114 (6) 106997. Meh, C. A. , J. -V. Rios-Rull, and Y. Terajima. 2008. pith and Welfare Effects of Redistribution of Wealth under In? ation and Price-Level Targeting. Bank of Canada working(a) Paper No. 2008-31. Meh, C. A. and Y. Terajima. 2008. In? ation, Nominal Portfolios, and Wealth Redistribution in Canada. Bank of Canada Working Paper No. 2008-19. 50 UNEXPECTED INFLATION AND REDISTRIBUTION OF WEALTH IN CANADA BANK OF CANADA REVIEW SPRING 2009