Ination, Inequality and Social Conict

This paper presents a political economy model of in‡ation as a result of social con‡ict. Agents are heterogeneous in terms of income. Agents’income levels determine their ability to hedge against the e¤ects of in‡ation. The interaction of heterogeneous cash holdings and preferences over …scal policy leads to con‡ict over how to …nance government expenditure. The model makes a number of predictions concerning which environments are conducive to the emergence of persistent in‡ation. In‡ation will tend to be higher in countries with higher inequality and with greater pro-rich bias in the political system. These results are largely con…rmed by the empirical portion of the paper. The paper’s novel features are its simpli…cations at the household level which allow for richer treatment of the income distribution and political process than in the related literature. The paper also gives closed form solutions and unequivocal comparative statics results. Note: Preliminary Research; please do not circulate more widely without consultation with author.