A political economy perspective on persistent inequality, inflation, and redistribution

Lahiri, Radhika & Ratnasiri, Shyama (2010) A political economy perspective on persistent inequality, inflation, and redistribution. Economic Modelling.

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In this paper we examine the dynamics of the link between inequality and inflation from a political economy perspective. We consider a simple dynamic general equilibrium model in which agents vote over the desired inflation rate in each period, and inequality is persistent. Inflation in our model is a mechanism of redistribution, and we find that the link between inequality and inflation within any period or over time depends on institutional and preference related parameters. Furthermore, we find that differences in the initial distributions of wealth can yield a diverse set of patterns for the evolution of the inflation and inequality link. Relative to existing literature, our model leads to more precise predictions about the inflation-inequality correlation. To that end, results in the extant empirical literature on the inflation and inequality link need to be interpreted with caution.

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ID Code: 32456
Item Type: Journal Article
Refereed: Yes
Keywords: Political economy, Inflation, Inequality, Redistribution, Voting
DOI: 10.1016/j.econmod.2010.02.011
ISSN: 0264-9993
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Macroeconomics (incl. Monetary and Fiscal Theory) (140212)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Copyright 2010 Elsevier BV
Deposited On: 08 Jun 2010 21:23
Last Modified: 29 Feb 2012 14:16

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