DP741 Does Inequality Cause Inflation? The Political Economy of Inflation, Taxation and Government Debt

Author(s): Roel Beetsma, Frederick van der Ploeg
Publication Date: November 1992
Keyword(s): Cross-Country Evidence, Discretion, Distribution, Government Debt, Inflation, Median Voter, Rules, Seigniorage, Taxation, Wealth
JEL(s): D3, E4, E6, H2, H3
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=741

A democratic society in which the distribution of wealth is unequal elects political parties which tend to represent the interests of the poor. The clientele of such governments favour unanticipated inflation taxes to erode the real value of debt service and redistribute income from the rich to the poor. Consequently, inequality sows the seeds for inflation. Regressions confirm the empirical predictions of the model and show a strong positive relationship between the inflation rate and inequality, for a cross-section of democratic countries.