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Who would vote for inflation in Brazil? : an integrated framework approach to inflation and income distribution

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  • Kane, Cheikh
  • Morisett, Jacques
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    Abstract

    Most studies of how inflation affects income distribution focus only on wages or the inflation tax. The authors argue that this approach can be misleading as it ignores important channels through which inflation affects income distribution. The authors present an integrated framework that combines interest bearing assets with labor income and cash holdings. This allows them to describe clearly the conditions under which inflation will create gainers and losers. They apply the model to Brazil, which is a prime candidate for this exercise because its economy combines skewed income distribution and high inflation. They show that in Brazil inflation helped worsen income distribution in the 1980s. Their major findings follow. In 1980-1989, the inflation induced income loss for the lowest quintile in Brazil was an estimated 19 percent a year, of which 16 percent is attributable to the erosion of real wages and the rest to the inflation tax. During the same period, Brazil's middle class which lost close to 30 percent of its annual income, was devastated because of its limited access to indexed assets. But the richest quintile managed to insulate itself from inflation by taking advantage of high real interest on demand deposits - without losing from reduced labor income. Had real assets and subsidized credits been considered in the analysis, the regressive effects on inflation would probably have been worse, say the authors. This raises aquestion: Do these findings about the distributional effects of inflation help explain Brazil's delays in adopting a stabilization program?

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1183.

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    Date of creation: 30 Sep 1993
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    Handle: RePEc:wbk:wbrwps:1183

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    Related research

    Keywords: Economic Theory&Research; Environmental Economics&Policies; Economic Conditions and Volatility; Inequality; Banks&Banking Reform;

    References

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    1. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
    2. David M. Cutler & Lawrence F. Katz, 1991. "Macroeconomic Performance and the Disadvantaged," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 1-74.
    3. Blejer, Mario I & Guerrero, Isabel, 1990. "The Impact of Macroeconomic Policies on Income Distribution: An Empirical Study of the Philippines," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 414-23, August.
    4. Carola Pessino, 1993. "From Aggregate Shocks to Labor Market Adjustments: Shifting of Wage Profiles Under Hyperinflation in Argentina," CEMA Working Papers: Serie Documentos de Trabajo. 95, Universidad del CEMA.
    5. Federico A. Sturzenegger, 1992. "Inflation and Social Welfare in a Model with Endogenous Financial Adaptation," UCLA Economics Working Papers 658, UCLA Department of Economics.
    6. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
    7. Federico Sturzenegger, 1992. "Inflation and Social Welfare in a Model With Endogenous Financial Adaptation," NBER Working Papers 4103, National Bureau of Economic Research, Inc.
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    Cited by:
    1. A. Saad-Filho, 1998. "Currency Stabilisation under Conditions of International Capital Mobility: The Case of Brazil," CIBS Research Papers in International Business 13-98, London South Bank University CIBS.
    2. Manoel Bittencourt, 2007. "Macroeconomic Performance and Inequality: Brazil 1983-1994," Ibero America Institute for Econ. Research (IAI) Discussion Papers 163, Ibero-America Institute for Economic Research.
    3. Christopher Crowe, 2004. "Inflation, inequality and social conflict," LSE Research Online Documents on Economics 19932, London School of Economics and Political Science, LSE Library.

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