The non‐monotonic relationship between seigniorage and inequality

Abstract

We present an analysis of how political factors may come into play in the equilibrium determination of inflation. We employ a standard overlapping generations model with heterogenous young-age endowments, and a government that funds an exogenous spending via a combination of non-distortionary income taxes and the inflation tax. Agents have access to two stores of value: fiat money and an inflationshielded, yet costly, asset. The model predicts that the relationship between elected reliance on the inflation tax (for revenue) and income inequality may be non-monotonic. We find robust empirical backing for this hypothesis from a cross-section of countries. JEL classification: E5, P16La relation non-monotone entre seigneuriage et ine´galite´. Ce me´moire pre´sente une analyse de la fac¸on dont les facteurs politiques peuvent jouer dans la de´termination du niveau d'inflation d'e´quilibre. On emploie un mode`le conventionnel de ge´ne´rations qui se chevauchent avec des dotations initiales he´te´roge`nes, et un gouvernement qui finance des de´penses exoge`nes graˆce a`une combinaison de taxes sur le revenu (qui n'engendrent pas de distorsions) et de taxes par l'inflation. Les agents ont acce`s a`deux fac¸ons d'entreposer leurs avoirs: la monnaie fiduciaire et un actif couˆteux mais prote´geć ontre les effets d'e´rosion de l'inflation. Le mode`le pre´dit que la relation entre le choix de s'en remettre a`la taxe par l'inflation (aux fins de revenu) et l'ine´galite´des revenus A previous version of this paper circulated as 'Inflationary finance in a simple voting model.' We record our debt to two anonymous referees for their input;

Speed and Sequencing of Transition Reforms and Income Inequality: A Panel Data Analysis

“…This is contrary to the evidence provided by Milanovic and Ersado () and Bhattacharya et al . (), but in line with other empirical findings (e.g., Gustafsson and Johansson, ; Nikoloski, ).…”

Institutional reform, technology adoption and redistribution: a political economy perspective

“…The direct voting approach using the majority rule, however, is commonly used in several papers and is an abstraction that is intended to capture the spirit of what is observed in the democratic process, while having the appeal of tractability. For example, Bhattacharya et al (2005) consider overlapping generation models where agents vote on the inflation rate, an abstraction intended to capture the idea of the lack of central bank independence and the presence of political pressure to use inflation as a means of redistribution. Likewise, Glomm and Ravikumar (1992) consider agents voting directly on the tax rate used to finance the public education system.…”

Inflation and the Income Share of the Rich: Evidence for 14 OECD Countries

“…However, using data for 140 countries, covering the period 1980-2018, conclude that there is no robust relationship between central bank independence and the Gini coefficient. Lahiri and Ratnasiri (2010) extend the model of Bhattacharya et al (2005) by allowing agents to leave bequests to the next generation. These authors find that the link between inequality and inflation in any period depends on institutional features such as the extent of progressive taxation in the economy, or the cost of adopting technologies that shield agents from inflation.…”