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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 9705.

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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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  1. Deininger, Klaus & Squire, Lyn, 1996. "A New Data Set Measuring Income Inequality," World Bank Economic Review, World Bank Group, World Bank Group, vol. 10(3), pages 565-91, September.
  2. Gregory W. Huffman, 1995. "An equilibrium analysis of central bank independence and inflation," Working Papers, Federal Reserve Bank of Dallas 9501, Federal Reserve Bank of Dallas.
  3. 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, Springer, vol. 87(1-2), pages 143-62, April.
  4. 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, Elsevier, vol. 39(1), pages 95-140, December.
  5. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 25(2), pages 151-62, May.
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