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Distributional Conflict, Financial Adaptation And Delayed Stabilizations

Author

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  • Raúl Labán
  • Federico Sturzenegger

Abstract

In this paper we model delayed stabilizations as the rational outcome of a distributional conflict between two risk averse groups in the presence of post‐stabilization payoff uncertainty and costly policy reversion. We show that in the initial stages of an extreme inflation episode there is a bias towards maintaining the current inefficient (but certain) revenue collection system which prevents the adoption of the required fiscal adjustment program. The access by those with higher income to a financial adaptation technology increases the average rate of inflation through time for any given government deficit, raising the welfare costs of not reaching an agreement and increasingly redistributing the burden of inflation to those with lower income. This process, if strong enough, will eventually trigger the necessary political support for the required fiscal adjustment. Delayed stabilizations will, nevertheless, induce the poor into accepting conditions that they did not find optimal before.

Suggested Citation

  • Raúl Labán & Federico Sturzenegger, 1994. "Distributional Conflict, Financial Adaptation And Delayed Stabilizations," Economics and Politics, Wiley Blackwell, vol. 6(3), pages 257-276, November.
    • Handle: RePEc:bla:ecopol:v:6:y:1994:i:3:p:257-276
    DOI: 10.1111/j.1468-0343.1994.tb00100.x
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    References listed on IDEAS

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