IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Inflation, Inequality and Social Conflict

  • Christopher Crowe

This paper presents a political economy model of inflation as a result of social conflict. Agents are heterogeneous in terms of income. Agents' income levels determine their ability to hedge against the effects of inflation. The interaction of heterogeneous cash holdings and preferences over fiscal policy leads to conflict over how to finance government expenditure. The model makes a number of predictions concerning which environments are conducive to the emergence of inflation. Inflation will tend to be higher in countries with higher inequality and with greater pro-rich bias in the political system. Conversely, the use of income tax will be higher in countries with lower inequality and less pro-rich bias. The model also predicts that although inequality and political bias will have an impact on the composition of revenue, it will have no effect on the overall level of government spending (assuming that spending is on public goods only). These results are largely confirmed by the empirical portion of the paper. The paper's novel features are its simplifications at the household level which allow for richer treatment of the income distribution and political process than in the related literature. The paper also gives unequivocal comparative statics results under relatively undemanding assumptions.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0657.

in new window

Date of creation: Nov 2004
Date of revision:
Handle: RePEc:cep:cepdps:dp0657
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Jose-Victor Rios-Rull & Per Krusell, 1999. "On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model," American Economic Review, American Economic Association, vol. 89(5), pages 1156-1181, December.
  2. Christina D. Romer & David Romer, 1999. "Monetary policy and the well-being of the poor," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 21-49.
  3. Easterly, William & Fischer, Stanley, 2000. "Inflation and the poor," Policy Research Working Paper Series 2335, The World Bank.
  4. Sebastian Edwards & Guido Tabellini, 1991. "Political Instability, Political Weakness and Inflation: An Empirical Analysis," NBER Working Papers 3721, National Bureau of Economic Research, Inc.
  5. Robert J. Shiller, 1996. "Why Do People Dislike Inflation?," Cowles Foundation Discussion Papers 1115, Cowles Foundation for Research in Economics, Yale University.
  6. Torsten Persson & Guido Tabellini, 1997. "Political Economics and Macroeconomic Policy," NBER Working Papers 6329, National Bureau of Economic Research, Inc.
  7. Mulligan, Casey B & Sala-i-Martin, Xavier, 1996. "Adoption of Financial Technologies: Implications for Money Demand and Monetary Policy," CEPR Discussion Papers 1358, C.E.P.R. Discussion Papers.
  8. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  9. Albanesi, Stefania, 2007. "Inflation and inequality," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1088-1114, May.
  10. Beetsma, R.M.W.J. & van der Ploeg, F., 1992. "Does inequality cause inflation? : The political economy of inflation, taxation and government debt," Discussion Paper 1992-30, Tilburg University, Center for Economic Research.
  11. Fischer, Stanley & Huizinga, John, 1982. "Inflation, Unemployment, and Public Opinion Polls," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 1-19, February.
  12. Milesi-Ferretti, Gian Maria, 1994. "Wage Indexation and Time Consistency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 941-50, November.
  13. Jim Dolmas & Gregory W. Huffman & Mark A. Wynne, 2000. "Inequality, inflation, and central bank independence," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 271-287, February.
  14. Andrés Erosa & Gustavo Ventura, 2000. "On Inflation as a Regressive Consumption Tax," UWO Department of Economics Working Papers 20001, University of Western Ontario, Department of Economics.
  15. repec:oup:qjecon:v:100:y:1985:i:4:p:1169-89 is not listed on IDEAS
  16. Click, Reid W, 1998. "Seigniorage in a Cross-Section of Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(2), pages 154-71, May.
  17. By Ales BulÌr, 2001. "Income Inequality: Does Inflation Matter?," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 5.
  18. Krusell, Per, 2002. "Time-consistent redistribution," European Economic Review, Elsevier, vol. 46(4-5), pages 755-769, May.
  19. Erzo G. J. Luttmer, 1999. "What Level of Fixed Costs Can Reconcile Consumption and Stock Returns?," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 969-997, October.
  20. Assar Lindbeck & Jörgen Weibull, 1987. "Balanced-budget redistribution as the outcome of political competition," Public Choice, Springer, vol. 52(3), pages 273-297, January.
  21. Anne Epaulard, 2003. "Macroeconomic Performance and Poverty Reduction," IMF Working Papers 03/72, International Monetary Fund.
  22. Eliana Cardoso, 1992. "Inflation and Poverty," NBER Working Papers 4006, National Bureau of Economic Research, Inc.
  23. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  24. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  25. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-55, June.
  26. Hassler, John & Krusell, Per & Storesletten, Kjetil & Zilibotti, Fabrizio, 2005. "The dynamics of government," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1331-1358, October.
  27. Ravallion, Martin & Datt, Gaurav, 2002. "Why has economic growth been more pro-poor in some states of India than others?," Journal of Development Economics, Elsevier, vol. 68(2), pages 381-400, August.
  28. Roland Benabou, 2000. "Unequal Societies: Income Distribution and the Social Contract," American Economic Review, American Economic Association, vol. 90(1), pages 96-129, March.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cep:cepdps:dp0657. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.