Inflation, Inequality, and Social Conflict

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper presents and then tests a political economy model to analyze the observed positive relationship between income inequality and inflation. The model's key features are unequal access to both inflation-hedging opportunities and the political process. The model predicts that inequality and 'elite bias' in the political system interact to create incentives for inflation. The paper's empirical section focuses on this predicted interaction effect. The identification strategy involves using the end of the Cold War as a source of exogenous variation in the political environment. It finds robust evidence in support of the model. JEL Classification Numbers: D31, E31, P16

Financial Development and Inequality: Brazil 1985-1999

“…that cause high in ‡ation, is a symptom of weak institutions and it is therefore nothing less than a redistributive device used by the 'elite'to enrich themselves at the expense of another group in society. Furthermore, Crowe (2006) suggests that in ‡ation is only brought under control when the 'elite bias' is reduced, and Albanesi (2007) argues that the poor are the ones to lose more with high in ‡ation for the fact that they have less political weight. Coincidentally enough, Brazil implemented sounder macroeconomic policies only in July 1994, well after democracy was fully implemented in 1989, or alternatively, when political polarisation diminished 5 .…”

Macroeconomic Performance and Inequality: Brazil, 1983–94

“…In addition, although the government at the time imposed minimum levels of indexation to secure the purchasing power of the poor, firms were free to reward higher productivity workers, or those at the upper end of the earnings distribution, with higher levels of wage indexation 7 Third, Alesina and Drazen (1991), Kane and Morisett (1993), Crowe (2006), and Albanesi (2007) highlight the political‐economy channel of high rates of inflation and inequality; i.e., that macroeconomic stabilization takes longer to be implemented in polarized societies, like Brazil over the period considered in the current study. Coincidentally, stabilization came in 1994, only after full democratization (or a reduction in political polarization) took place in 1989, and inequality has been decreasing since 1995 8 …”

A Heterodox Economics Critique of Financial Liberalization

“…From the highest positions of establishment orthodoxy comes the theorem, derived from exacting statistical testing, that inflation, inequality, and class conflict are correlated (Crowe, 2006). The inflation tax is regressive not the least because workers and capitalists have differing access to inflation-proof assets.…”