Working Paper: CEPR ID: DP741
Authors: Roel M. W. J. Beetsma; Frederick van der Ploeg
Abstract: A democratic society in which the distribution of wealth is unequal elects political parties which tend to represent the interests of the poor. The clientele of such governments favour unanticipated inflation taxes to erode the real value of debt service and redistribute income from the rich to the poor. Consequently, inequality sows the seeds for inflation. Regressions confirm the empirical predictions of the model and show a strong positive relationship between the inflation rate and inequality, for a cross-section of democratic countries.
Keywords: taxation; seigniorage; inflation; government debt; wealth distribution; rules versus discretion; median voter democracies
JEL Codes: D3; E4; E6; H2; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political representation (D72) | unanticipated inflation taxes (E31) |
| unanticipated inflation taxes (E31) | real value of government debt (H63) |
| inequality (D63) | unanticipated inflation taxes (E31) |
| inequality (D63) | real value of government debt (H63) |
| inequality (D63) | inflation (E31) |
| government debt to GDP ratio increase (H69) | inflation (E31) |
| inequality (D63) | inflation rate difference (E31) |