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Inflation, Inequality and Social Conflict

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  • Christopher Crowe

Abstract

This paper presents a political economy model of inflation as a result of social conflict. Agents are heterogeneous in terms of income. Agents' income levels determine their ability to hedge against the effects of inflation. The interaction of heterogeneous cash holdings and preferences over fiscal policy leads to conflict over how to finance government expenditure. The model makes a number of predictions concerning which environments are conducive to the emergence of inflation. Inflation will tend to be higher in countries with higher inequality and with greater pro-rich bias in the political system. Conversely, the use of income tax will be higher in countries with lower inequality and less pro-rich bias. The model also predicts that although inequality and political bias will have an impact on the composition of revenue, it will have no effect on the overall level of government spending (assuming that spending is on public goods only). These results are largely confirmed by the empirical portion of the paper. The paper's novel features are its simplifications at the household level which allow for richer treatment of the income distribution and political process than in the related literature. The paper also gives unequivocal comparative statics results under relatively undemanding assumptions.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0657.

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Date of creation: Nov 2004
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Handle: RePEc:cep:cepdps:dp0657

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

Related research

Keywords: probabilistic voting; distributional conflict; fiscal policy; inequality; inflation;

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References

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Citations

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Cited by:
  1. Hefeker, Carsten, 2008. "Taxation, Corruption and the Exchange Rate Regime," Proceedings of the German Development Economics Conference, Zurich 2008 17, Verein für Socialpolitik, Research Committee Development Economics.
  2. Manoel Bittencourt, 2008. "Macroeconomic Performance and Inequality: Brazil 1983-1994," Working Papers 101, Economic Research Southern Africa.
  3. Gomes, Orlando, 2006. "Can social interaction contribute to explain business cycles?," MPRA Paper 2848, University Library of Munich, Germany.
  4. Bittencourt, Manoel, 2008. "Inflation and Financial Development: Evidence from Brazil," Working Papers RP2008/14, World Institute for Development Economic Research (UNU-WIDER).
  5. Bittencourt, Manoel, 2010. "Democracy, Populism and Hyperinflation[s]: Evidence from Latin America," Proceedings of the German Development Economics Conference, Hannover 2010 47, Verein für Socialpolitik, Research Committee Development Economics.
  6. Manoel Bittencourt, 2007. "Financial Development and Inequality: Brazil 1985-1994," Ibero America Institute for Econ. Research (IAI) Discussion Papers 164, Ibero-America Institute for Economic Research.
  7. Menji, Sisay, 2008. "Determinants of Recent Inflation in Ethiopia," MPRA Paper 29668, University Library of Munich, Germany.
  8. Olmo Silva, 2004. "Entrepreneurship: Can the Jack-of-All-Trades Attitude be Aquired?," CEP Discussion Papers dp0665, Centre for Economic Performance, LSE.

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