Inflation and Income Distribution: Further Evidenceon Empirical Links

IMF Working Papers, August 1, 1995

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Inflation and Income Distribution: Further Evidenceon Empirical Links

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Bibliographic details

• Authors: Anne Marie Gulde
• Published: August 1, 1995
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451850826.001

Summary

• This paper examines the effects of inflation and associated financial instability on income distribution.
• Using both pooled cross country and single country time series models, the paper shows that:
  • the level of inflation,
  • inflation variability, and
  • the variability of the nominal exchange rate

are shown to impact negatively on overall income equality.

• Looking at disaggregate measures of income distribution, the question of whether inflation is a progressive or regressive tax is found to be negatively correlated with:
  • the level of development, and
  • the sophistication of the financial structure.
• The paper argues that these results point towards financial variables as a partial way of rectifying the generally poor explanatory power of both cross-country and time series models of income distribution.

Key empirical findings

• Level of inflation is negatively associated with overall income equality.
• Inflation variability is negatively associated with overall income equality.
• Variability of the nominal exchange rate is negatively associated with overall income equality.
• The relationship between inflation and its incidence on different income groups (progressive vs. regressive) is negatively correlated with:
  • level of development, and
  • sophistication of the financial structure.

Methodology (as described)

• Empirical approach uses:
  • pooled cross country models, and
  • single country time series models.
• Disaggregate measures of income distribution are analyzed to assess the progressive vs. regressive incidence of inflation.

Analytical implication

• Financial variables (e.g., measures of financial structure and sophistication) can help improve the explanatory power of models linking inflation and income distribution.
• The interaction between inflation dynamics and financial structure is central to understanding distributional outcomes.

Policy-relevant interpretation

• Strengthening financial structure and sophistication is implied as a partial avenue to mitigate the negative distributional effects of inflation and inflation instability.
• Addressing inflation variability and nominal exchange rate volatility can be important for preserving income equality.

Source: Inflation and Income Distribution: Further Evidenceon Empirical Links, Anne Marie Gulde, IMF Working Papers 1995, 086 (August 1, 1995).