Inflation, inequality, and social conflict, Issues 2006-2158
International Monetary Fund, Research Dept., 2006 - Business & Economics - 37 pages
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.
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2SLS ABias agents hold cash alliance portfolio asset holding assumption Benabou Besley biased candidate capture cash-holders change in elite cohort Cold War alliance columns Comparative Statics consumption corner solution correlation country dummies country group cross-country DD estimates democracy score democratization differential Dolmas Easterly and Fischer Economic elite bias empirical endogenous endowment equilibrium excluded instruments exogenous F Statistic fixed cost function Gini coefficient Hence high inequality countries higher inflation homoskedastic identification strategy income distribution income inequality income tax increases inflation and inequality inflation averse inflation tax rate initial level instrumental variables iso-7 line Iso-y LIML Lorenz curve Lorenz-dominated low inequality countries measure non-cash-holders observations p-value paper percent level period Phillips Curve policymaker political bias political economy solution Political Optimization political weight Polity IV predicted interaction effect Proposition Pt+i redistribution robustness check second asset seigniorage Soviet Union specific statistically significant Table utility weak instruments