Conflict Inflation, Political Exchange and Failed Stabilization in Post-Convertibility Argentina

A widely held belief suggests that inflation disproportionately affects low-income individuals, creating a puzzle for some researchers. This puzzle arises because, despite the perceived negative impact on the lower-income demographic, they tend to support governments that actively promote inflation. However, this apparent contradiction can be resolved when considering scenarios where the government supports a progressive redistribution of the inflationary tax. This paper introduces a model grounded in the political exchange hypothesis, where three interest groups – businesspeople, rentiers, and workers – express their demand for inflation. Political parties engage in competition to attain governmental power. The model illustrates that the inflation rate in post-convertibility Argentina, even when excessively high, aligns with the preferences of a coalition in power comprising businesspeople and workers. This coalition derives a portion of its income from the inflationary tax imposed on financial rentiers. Although a stabilization attempt commenced in December 2015 following a shift in the political landscape (Macrì’s election), it encountered setbacks. The subsequent change in coalition and its failure are also analysed through the lens of the model. We employ, moreover, a wavelet coherence analysis to test the validity of the theoretical model.