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Inequality, inflation, and central bank independence

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  • Jim Dolmas
  • Gregory W. Huffman
  • Mark A. Wynne

Abstract

What can account for the different contemporaneous inflation experiences of various countries, and of the same country over time? We present an analysis of the determination of inflation from a political economy perspective. We document a positive correlation between income inequality and inflation and then present a theory of the determination of inflation outcomes in democratic societies that illustrates how greater inequality leads to greater inflation, owing to a desire by voters for wealth redistribution. We conclude by showing that democracies with more independent central banks tend to have better inflation outcomes for a given degree of inequality.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 97-05.

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Date of creation: 1997
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Handle: RePEc:fip:feddwp:97-05

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Keywords: Banks and banking; Central ; Inflation (Finance);

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References

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  1. Klaus Deininger & Lyn Squire, 1996. "A New Data Set Measuring Income Inequality," CEMA Working Papers 512, China Economics and Management Academy, Central University of Finance and Economics.
  2. Beetsma, Roel M W J & van der Ploeg, Frederick, 1996. " Does Inequality Cause Inflation?: The Political Economy of Inflation, Taxation and Government Debt," Public Choice, Springer, vol. 87(1-2), pages 143-62, April.
  3. Cukierman, Alex & Kalaitzidakis, Pantelis & Summers, Lawrence H. & Webb, Steven B., 1993. "Central bank independence, growth, investment, and real rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 95-140, December.
  4. Gregory W. Huffman, 1997. "An Equilibrium Analysis of Central Bank Independence and Inflation," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 943-58, November.
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Cited by:
  1. Hoover, Gary A. & Giedeman, Daniel C. & Dibooglu, Sel, 2009. "Income inequality and the business cycle: A threshold cointegration approach," Economic Systems, Elsevier, vol. 33(3), pages 278-292, September.
  2. Marta Areosa & Waldyr Areosa, 2006. "The Inequality Channel of Monetary Transmission," Working Papers Series 114, Central Bank of Brazil, Research Department.
  3. Albanesi, Stefania, 2007. "Inflation and inequality," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1088-1114, May.
  4. repec:ebl:ecbull:v:5:y:2008:i:9:p:1-8 is not listed on IDEAS
  5. Jeroen Klomp & Jakob Haan, 2010. "Central bank independence and inflation revisited," Public Choice, Springer, vol. 144(3), pages 445-457, September.
  6. Joydeep Bhattacharya & Helle Bunzel & Joseph Haslag, 2005. "The non-monotonic relationship between seigniorage and inequality," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 500-519, May.
  7. Hermann Sintim-Aboagye & David Tufte, 2006. "Central Bank Independence, Inflation Variability, and the Revenue Smoothing Hypothesis," International Advances in Economic Research, Springer, vol. 12(2), pages 147-160, May.
  8. Diana N. Weymark, 2001. "Inflation, Income Redistribution, and Optimal Central Bank Independence," Vanderbilt University Department of Economics Working Papers 0102, Vanderbilt University Department of Economics.
  9. Diana N. Weymark, 2005. "Inflation, Government Transfers, and Optimal Central Bank Independence," Vanderbilt University Department of Economics Working Papers 0502, Vanderbilt University Department of Economics.
  10. Radhika Lahiri & Elisabetta Magnani, 2007. "On Skill Heterogeneity, Human Capital, and Inflation," International Advances in Economic Research, Springer, vol. 13(3), pages 393-394, August.
  11. Stuart J. Fowler, 2005. "Income Inequality, Monetary Policy, and the Business Cycle," Computing in Economics and Finance 2005 184, Society for Computational Economics.
  12. Christopher W. Crowe, 2006. "Inflation, Inequality, and Social Conflict," IMF Working Papers 06/158, International Monetary Fund.
  13. Hermann Sintim-Aboagye, 2005. "Emerging Economies, Turnover Rates and Inflation Variability: A Comparison of Generalized Maximum Likelihood and SUR Models," Economic Change and Restructuring, Springer, vol. 38(2), pages 167-178, June.
  14. Hermann Sintim-Aboagye & Chandana Chakraborty & Serapio Byekwaso, 2012. "Uncertainty of inflation and inflation rate: Does credibility of inflation policy matter?," Economic Issues Journal Articles, Economic Issues, vol. 17(2), pages 95-110, September.
  15. Lahiri, Radhika & Ratnasiri, Shyama, 2010. "A political economy perspective on persistent inequality, inflation, and redistribution," Economic Modelling, Elsevier, vol. 27(5), pages 1199-1210, September.
  16. Weymark, Diana N., 2007. "Inflation, government transfers, and optimal central bank independence," European Economic Review, Elsevier, vol. 51(2), pages 297-315, February.
  17. James P Walsh & Jiangyan Yu, 2012. "Inflation and Income Inequality: Is Food Inflation Different?," IMF Working Papers 12/147, International Monetary Fund.

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