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Income, employment and distribution effects of inflation

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  • Miroslav Verbic

    (University of Maribor, Slovenia - Faculty of Economics and Business)

Abstract

In this paper effects of inflation are more closely examined. In theory there can five different economic effects of inflation be indicated: income, employment, distribution, allocation and growth effect, of which first tree were mainly subject of our study. However, the other two effects cannot be separated and are therefore highly integrated with the ones studied. Effects of inflation depend mainly on the type of inflation anticipation and balance) and on the phase in which inflation is found (accelerated, decelerated or stable), but each income and wealth formation as well as each income holder and wealth owner is principally involved when inflation strikes, hence distribution effects can appear on all possible distribution levels. Income effects of inflation are deviations of growth rate of the GDP below or above its natural growth rate, caused by inflation. Employment effects are usually defined as difference between natural and actual rate of unemployment and are therefore in strong connection with income effects. This section also includes "wage-bargaining" effect. The main redistribution impact of inflation occurs through its effect on the real value of economic participant's wealth. In general, unanticipated inflation redistributes wealth from creditors to debtors, helping borrowers and hurting lenders. An unanticipated decline in inflation has the opposite effect. But inflation is mostly mixing income and assets, randomly redistributing wealth among the population (all economic participants, as already said) with little significant impact on any single group. So-called "bracket- creep" effect is also explained here. It should also be mentioned that there are different approaches of main schools of economic thought to inflation and stabilizing economic policy, which should be more thoroughly examined. It is true that well- measured and above all continuous tight economic policy is the most effective way to fight inflation and its negative effects, but one of the main points is also to reduce inflation expectations (danger of inflation inertia) and soften the wage bargaining. Many of these areas were are examined in this paper. Nevertheless, there are still a lot of uncleared points in the area of inflation and its impacts being left for further research.

Suggested Citation

  • Miroslav Verbic, 2000. "Income, employment and distribution effects of inflation," Macroeconomics 0012004, EconWPA, revised 01 Feb 2002.
  • Handle: RePEc:wpa:wuwpma:0012004
    Note: Type of Document - Adobe PDF; prepared on IBM PC; to print on HP; pages: 33 ; figures: included. Paper is in English language. Available also in Slovenian language (contact author).
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    Keywords

    inflation effect distribution income employment;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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