The Inflation-Distribution Nexus: A Theoretical and Empirical Approach

ABSTRACT

There are two unconnected strands of the inflation-distribution literature, one that studies the impact of inflation on income distribution and the other the impact of distribution on inflation. This paper is an attempt to fill a gap in this literature, by taking into account the simultaneous determination between inflation and income distribution. We set forth a Post-Keynesian model in which inflation and income distribution are jointly determined in a dynamical system of difference equations. Then, we conducted an empirical investigation of the relationship between inflation and distribution using a Panel Vector Autoregressive (PVAR) model since this econometric technique is robust to reverse causality. Our findings corroborate our theoretical model by showing that increases in the wage share tend to exert a downward pressure in future inflation.

KEYWORDS:

• Cost-push inflation
• income distribution
• Kaleckian models
• PVAR

JEL CODE:

• C33
• C60
• D33
• E12
• E31

Acknowledgements

The authors gratefully acknowledge useful comments and suggestions from João Romero, Fabricio Missio, participants of the 45th annual conference of the Eastern Economic Association and two anonymous referees. The usual disclaimer applies.

Disclosure Statement

No potential conflict of interest was reported by the author(s).