Advertisement

Public Choice

, Volume 87, Issue 1–2, pp 143–162 | Cite as

Does inequality cause inflation?: The political economy of inflation, taxation and government debt

  • Roel M. W. J. Beetsma
  • Frederick Van Der Ploeg
Article

Abstract

A democratic society in which the distribution of wealth is unequal elects political parties that are likely to represent the interests of poor people. It is in the interests of the clientele of the resulting governments to attempt to levy inflation taxes in order to erode the real value of debt service and redistribute from the rich to the poor. Consequently, inequality and high levels of nominal government debt sow the seeds for inflation. Some cross-country evidence for this proposition is provided.

Keywords

Political Economy Public Finance Political Party Poor People Democratic Society 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Alesina, A. and Drazen, A. (1991). Why are stabilizations delayed? American Economic Review 81(5): 1170–1188.Google Scholar
  2. Alesina, A. and Rodrik, D. (1994). Distributive policies and economic growth. Quarterly Journal of Economics 109(2): 465–490.Google Scholar
  3. Atkinson, A.B. and Stiglitz, J.E. (1980). Lectures on public economics. London: McGraw-Hill.Google Scholar
  4. Bach, G.L. and Stephenson, J.B. (1974). Inflation and the redistribution of wealth. Review of Economics and Statistics 56: 1–13.Google Scholar
  5. Banks, A.S. (1979). Cross-national time-series data archive. Center for Social Analysis, State University of New York at Binghamton, September.Google Scholar
  6. Barro, R.J. (1979). On the determination of the public debt. Journal of Political Economy 87(5): 940–971.Google Scholar
  7. Barro, R.J. (1983). Inflationary finance under rules and discretion. Canadian Journal of Economics 41: 1–16.Google Scholar
  8. Barro, R.J. and Gordon, D.B. (1983). Rules, discretion and reputation in a model of monetary policy. Journal of Monetary Economics 12: 101–121.Google Scholar
  9. Barro, R.J. and Wolf, H.C. (1989). Data appendix for economic growth in a cross-section of countries. Unpublished. NBER, Cambridge, MA.Google Scholar
  10. Blinder, A.S. and Esaki, H.Y. (1978). Macroeconomic activity and income distribution in the postwar United States. Review of Economics and Statistics 60: 604–609.Google Scholar
  11. Canzoneri, M.B. and Rogers, C.A. (1990). Is the European Community an optimal currency area? Tax smoothing versus the costs of multiple currencies. American Economic Review 80(3): 419–433.Google Scholar
  12. Cukierman, A., Edwards, S. and Tabellini, G. (1992). Seigniorage and political instability. American Economic Review 82(3): 537–555.Google Scholar
  13. Dornbusch, R. and Edwards, S. (1989). Macroeconomic populism in Latin America. Working Paper No. 2986, NBER, Cambridge, MA.Google Scholar
  14. Drazen, A. and Grilli, V.U. (1993). The benefits of crises for economic reforms. American Economic Review 83: 598–607.Google Scholar
  15. Fischer, S. and Summers, L.H. (1989). Should governments learn to live with inflation? American Economic Review, Papers & Proceedings 79: 382–387.Google Scholar
  16. Hibbs, D.A. (1977). Political parties and macroeconomic policy. American Political Science Review 71: 1467–87.Google Scholar
  17. Kessler, D. and Wolff, E.N. (1991). A comparative analysis of household wealth patterns in France and the United States. Review of Income and Wealth 37: 249–266.Google Scholar
  18. Lippi, F. and Swank, O. (1993). Do policy makers' distributional desires lead to an inflationary bias? Mimeo. Erasmus University, Rotterdam.Google Scholar
  19. Mankiw, N.G. (1987). The optimal collection of seigniorage: Theory and evidence. Journal of Monetary Economics 20: 327–341.Google Scholar
  20. Obstfeld, M. (1991). Dynamic seigniorage theory: An exploration. Discussion Paper No. 519, CEPR, London.Google Scholar
  21. Persson, T. and Tabellini, G. (1992). Growth, distribution and politics. In A. Cukierman, Z. Hercowitz and L. Leiderman (Eds.), The political economy of business cycles and growth. Cambridge, MA: MIT Press.Google Scholar
  22. Phelps, E.S. (1973). Inflation in the theory of public finance. Swedish Journal of economics 75: 67–82.Google Scholar
  23. Ploeg, F. van der (1991). Unanticipated inflation and government finance: A case for an independent common central bank. Discussion Paper No. 562, CEPR, London.Google Scholar
  24. Ploeg, F. van der (1995). Political economy of monetary and budgetary policy. International Economic Review 36: 427–439.Google Scholar
  25. Rogoff, K. (1989). Reputation, coordination and monetary policy. In R.J. Barro (Ed.), Modern business cycle theory. Cambridge, MA: Harvard University Press.Google Scholar
  26. Roubini, N. and Sala-i-Martin, X. (1992). A growth model of inflation, tax evasion and financial repression. Working Paper No. 4062, NBER, Cambridge, MA.Google Scholar
  27. Sachs, J.D. (1989). Social conflict and populist policies in Latin America. Working Paper No. 2897, NBER, Cambridge, MA.Google Scholar
  28. Summers, R. and Heston, A. (1988). A new set of international comparisons of real product and price levels: Estimates for 130 countries. Review of Income and Wealth 34: 1–25.Google Scholar
  29. Wolff, E.N. (1979). The distributional effects of the 1969–75 inflation on holdings of household wealth in the United States. Review of Income and Wealth 25: 195–207.Google Scholar
  30. Wolff, E.N. (1994). Trends in household wealth in the United States: 1962–1983 and 1983–1989. Review of Income and Wealth 40(2): 143–174.Google Scholar

Copyright information

© Kluwer Academic Publishers 1996

Authors and Affiliations

  • Roel M. W. J. Beetsma
    • 1
  • Frederick Van Der Ploeg
    • 2
  1. 1.LIFE/Department of EconomicsUniversity of LimburgMaastricht
  2. 2.Department of EconomicsUniversity of Amsterdam, and CEPRThe Netherlands

Personalised recommendations