Inequality and the Inflation Tax
39 Pages Posted: 24 Jan 2018 Last revised: 15 Jul 2018
Date Written: June 24, 2018
Numerous studies document a positive correlation between inflation and income inequality. I show that this correlation---once an important ``stylized fact"---has reversed, and more generally that its sign depends on the time period and sample of countries. In the literature on the political economy of inflation, monetary financing and income taxes are substitutes. Correspondingly, I show that as the correlation between inequality and inflation has become more negative, the correlation between inequality and income tax revenue has become more positive. Both of these trends are primarily driven by European economies. Panel and cross section regressions suggest that these striking changes in the political economy of inflation can be explained by rising democratization and central bank independence. That is, in democracies, a sufficiently independent central bank can resist the political pressures for inflation that rise with inequality.
Keywords: Inflation, inequality, political economy, central bank independence, democratization, seignorage
JEL Classification: D31, E31, E50, P16
Suggested Citation: Suggested Citation