metadata: authors: 0: author: Kane, Cheikh
1: author: Morisett, Jacques
count: Brazil
docna: 0: docna: Who would vote for inflation in Brazil? : an
            integrated framework approach to inflation and income distribution
docty: Policy Research Working Paper
subtopic: Educational Sciences,Poverty Reduction Strategies,Inflation,Employment and Unemployment,Natural Disasters
teratopic: Poverty Reduction
abstracts: cdata!: Most studies of how inflation affects
            income distribution focus only on wages or the inflation
            tax. The authors argue that this approach can be misleading
            as it ignores important channels through which inflation
            affects income distribution. The authors present an
            integrated framework that combines interest bearing assets
            with labor income and cash holdings. This allows them to
            describe clearly the conditions under which inflation will
            create gainers and losers. They apply the model to Brazil,
            which is a prime candidate for this exercise because its
            economy combines skewed income distribution and high
            inflation. They show that in Brazil inflation helped worsen
            income distribution in the 1980s. Their major findings
            follow. In 1980-1989, the inflation induced income loss for
            the lowest quintile in Brazil was an estimated 19 percent a
            year, of which 16 percent is attributable to the erosion of
            real wages and the rest to the inflation tax. During the
            same period, Brazil's middle class which lost close to
            30 percent of its annual income, was devastated because of
            its limited access to indexed assets. But the richest
            quintile managed to insulate itself from inflation by taking
            advantage of high real interest on demand deposits - without
            losing from reduced labor income. Had real assets and
            subsidized credits been considered in the analysis, the
            regressive effects on inflation would probably have been
            worse, say the authors. This raises a question: Do these
            findings about the distributional effects of inflation help
            explain Brazil's delays in adopting a stabilization program?
geo_reg_key: 119228,517191
repnme: repnme: Who would vote for inflation in Brazil? :
            an integrated framework approach to inflation and income distribution
display_title: Who would vote for inflation in
            Brazil : an integrated framework approach to inflation and
            income distribution
listing_relative_url: /research/1993/09/698861/would-vote-inflation-brazil-integrated-framework-approach-inflation-income-distribution
topicv3: Inflation m1326709 0870F4727ACED1CF8525815C00471347,Education m1327048 470,Erosion m1503662 3202,Income Inequality m1503891 2668,Unemployment m1504051 2747
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Poverty Reduction
origu: Latin America and Caribbean: Country
            Department I
no_of_pages: 34
model_extractions: <!-- Start of picture text --> ntryt OporJtdons<br><!-- End of picture text --> WPS i183 is part of a larger This paper-a product of the Latin America and the Caribbean, Country Department I - is part of a larger e.fort in the department to understand the social dimensions of inflation. Copies of the pa:x r are available free from the World Bank, 1818 H Steet NW, Washington, DC 20433. Please contact Tania Hollestelle, room 17-041, eIxtension 30968 (September 1993, 29 pages).

Most studies of how inflation affects income distribution focus only on wages or the inflation tax. Kane and Morisett argue that this approach could be misleading as it ignores important channels through which infladon affects income distribution.

The authors present an integrated framework that combines interest-bearing assets with labor income and cash holdings This allows them to describe clearly the conditions under which inflation will create gainers and losers.

They apply the model to Brazil, which is a prime candidate for this exercise because its 3conomy combines skewed income distribution and high inflation. They show that in Brazil infladion helped worsen i.,come distribution in the 1980s. Their major findings are as follows: In 1980-89, the inflation-induced income loss for the lowest quintile in Brazil was an estimated 19 percent a year, of which 16 percent is attributable to the erosion of eal wages and the rest to the inflation tax.

* During the same period, Braz:l's middle class, which lost close to 30 percent of its annual income, was devastated because of its limited access to indexed assets.

* But the richest quintile manag-d to insulate itself from inflation by taking advartage of high real interest on demand deposits - without losing from reduced labor income. Had real assets and subsidized credit been considered in the analysis, the regressive effects of inflation would probably lave been even worse, say Kane and Morisett.

This raises a question: Do these findings about the distributional effects of inflation help explain Brazil's delavs in adopting a stabilization program?

The Policy Research Working PaperSeriesdisseminates the flndings of work under way in the Bankl Anobjectiveof the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations. and conclusions in these papers do not necessarily represent official Bank policy.

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