Inflation, Inequality and Social Conflict

Christopher Crowe ()

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper presents a political economy model of inflation as a result of social conflict. Agents are heterogeneous in terms of income. Agents' income levels determine their ability to hedge against the effects of inflation. The interaction of heterogeneous cash holdings and preferences over fiscal policy leads to conflict over how to finance government expenditure. The model makes a number of predictions concerning which environments are conducive to the emergence of inflation. Inflation will tend to be higher in countries with higher inequality and with greater pro-rich bias in the political system. Conversely, the use of income tax will be higher in countries with lower inequality and less pro-rich bias. The model also predicts that although inequality and political bias will have an impact on the composition of revenue, it will have no effect on the overall level of government spending (assuming that spending is on public goods only). These results are largely confirmed by the empirical portion of the paper. The paper's novel features are its simplifications at the household level which allow for richer treatment of the income distribution and political process than in the related literature. The paper also gives unequivocal comparative statics results under relatively undemanding assumptions.

Keywords: probabilistic voting; distributional conflict; fiscal policy; inequality; inflation (search for similar items in EconPapers)
JEL-codes: D31 D72 E31 E50 E60 H20 H30 (search for similar items in EconPapers)
Date: 2004-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://cep.lse.ac.uk/pubs/download/dp0657.pdf (application/pdf)

Related works:
Working Paper: Inflation, Inequality and Social Conflict (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp0657

Access Statistics for this paper

More papers in CEP Discussion Papers from Centre for Economic Performance, LSE
Bibliographic data for series maintained by ().