Who would vote for inflation in Brazil?: an integrated framework approach to inflation and income distribution

Cheikh Kane and Jacques Morisett

No 1183, Policy Research Working Paper Series from The World Bank

Abstract: Most studies of how inflation affects income distribution focus only on wages or the inflation tax. The authors argue that this approach can be misleading as it ignores important channels through which inflation affects income distribution. The authors present an integrated framework that combines interest bearing assets with labor income and cash holdings. This allows them to describe clearly the conditions under which inflation will create gainers and losers. They apply the model to Brazil, which is a prime candidate for this exercise because its economy combines skewed income distribution and high inflation. They show that in Brazil inflation helped worsen income distribution in the 1980s. Their major findings follow. In 1980-1989, the inflation induced income loss for the lowest quintile in Brazil was an estimated 19 percent a year, of which 16 percent is attributable to the erosion of real wages and the rest to the inflation tax. During the same period, Brazil's middle class which lost close to 30 percent of its annual income, was devastated because of its limited access to indexed assets. But the richest quintile managed to insulate itself from inflation by taking advantage of high real interest on demand deposits - without losing from reduced labor income. Had real assets and subsidized credits been considered in the analysis, the regressive effects on inflation would probably have been worse, say the authors. This raises aquestion: Do these findings about the distributional effects of inflation help explain Brazil's delays in adopting a stabilization program?

Keywords: Economic Theory&Research; Environmental Economics&Policies; Economic Conditions and Volatility; Inequality; Banks&Banking Reform (search for similar items in EconPapers)
Date: 1993-09-30
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Citations: View citations in EconPapers (11)

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