Working Paper

Inequality, inflation, and central bank independence

Abstract: What can account for the different contemporaneous inflation experiences of various countries, and of the same country over time? We present an analysis of the determination of inflation from a political economy perspective. We document a positive correlation between income inequality and inflation and then present a theory of the determination of inflation outcomes in democratic societies that illustrates how greater inequality leads to greater inflation, owing to a desire by voters for wealth redistribution. We conclude by showing that democracies with more independent central banks tend to have better inflation outcomes for a given degree of inequality.

JEL Classification: E5; H0;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 1997

Number: 9705

Note: Published as: Dolmas, Jim, Gregory W. Huffman and Mark A. Wynne (2000), "Inequality, Inflation, and Central Bank Independence," Canadian Journal of Economics 33 (1): 271-287.