Inflation and wealth inequality

Abstract

Much effort has been devoted to exploring the consequences of inflation on income inequality. Little documented is the effect on wealth inequality, which is more important in determining economic opportunities and rewards and hence political power. To close the void, the paper empirically examines whether inflation affects wealth inequality proxied by top wealth shares, with special emphasis on potential nonlinearity as well as associated mechanisms. In a sample of developing and developed countries, we find that top wealth shares have a U process whereas bottom wealth shares follow a hump-shaped path when inflation increases. Wealth inequality first decreases and then increases with inflation and there exists an inflation threshold such that an increase or decrease in inflation will lead to a rise in wealth inequality. Similar results are reached when considering income shares. Pathway analyses highlight that entrepreneurship and asset prices are potential channels through which inflation impacts wealth inequality.