Inequality, inflation, and central bank independence

Abstract

What can account for the different contemporaneous inflation experiences of various countries, and of the same country over time? We present an analysis of the determination of inflation from a political economy perspective. We document a positive correlation between income inequality and inflation and then present a theory of the determination of inflation outcomes in democratic societies that illustrates how greater inequality leads to greater inflation, owing to a desire by voters for wealth redistribution. We conclude by showing that democracies with more independent central banks tend to have better inflation outcomes for a given degree of inequality. JEL Classification E5, H0Inégalité, inflation et l'indépendance de la banque centrale. Quels sont les facteurs qui pourraient expliquer les expériences inflationnistes tellement différentes des divers pays dans le passé récent, et l'expérience tellement différente d'un pays donné dans le temps? Les auteurs analysent ce problème de la détermination du taux d'inflation dans une perspective d'économie politique. Ils déterminent qu'il y a une corrélation positive entre l'inégalité et l'inflation, et présentent une théorie de la détermination de l'inflation dans les sociétés démocratiques qui montre comment une inégalité plus grande entraîne une inflation plus grande à cause du désir des électeurs de demander une redistribution de la richesse. Le mémoire montre en terminant que les démocraties equipées de banques centrales plus indépendantes tendent à avoir de meilleurs résultats en terme d'inflation pour un degré d'inégalité donné.

The non‐monotonic relationship between seigniorage and inequality

“…Following Dolmas, Huffman, and Wynne (2000), we introduce a democratically elected government as the entity that must raise revenue to finance a fixed exogenous level of spending (that benefits no one). In our set‐up, there are two instruments for revenue generation: a lump‐sum tax paid by the young and an inflation tax.…”

Emerging Economies, Turnover Rates and Inflation Variability: A Comparison of Generalized Maximum Likelihood and SUR Models

“…Empirical studies by Banaian and Willett (1983), 2 Bade and Parkin (1985), Grilli et al (1991), Cukierman et al (1992), Cukierman et al (1993), Alesina and Summers (1993) and Eijffinger and de Haan (1996) Dolmas et al (2000), Neyapti (2003), Diana and Sidiropoulos (2004), Down (2004) and Siklos (2004), among others, confirm the trade off between inflation rate and CBI. In another CBI-Inflation tradeoff test, Spiegel (1998) attempts to record the announcement effect of the May 6th, 1997 decision to enhance the independence of the British central bank, the Bank of England.…”

Central Bank Independence, Inflation Variability, and the Revenue Smoothing Hypothesis

“…Empirical and theoretical findings imply an inverse relationship between CBI and the level or first moment of the inflation rate. Results of empirical tests on the relationship between inflation and CBI by Bade and Parkin [1985], Alesina [1988], Grilli et al [1991], Cukierman et al [1992], Neyapti [2003], Dolmas et al [2000], Down [2004] and Siklos [2004] all confirm a significant and negative relationship between inflation and central bank independence. This paper extends the existing literature by using CBI not only to explain inflation, but also by introducing CBI into the inflation-tax milieu as an explanatory variable.…”