New study delves into income inequality and inflation

A new study by Edgar Ghossoub, associate professor of economics at The University of Texas at San Antonio, posits that income inequality, in varying economies, can have substantial positive and negative effects for people in all walks of life depending on what kind of financial system they live under.

Income inequality became a wide public issue after the 2008 financial crisis, which was followed in later years by the Occupy movement. Protesters were especially frustrated with the massive gap in wealth between the millionaires and billionaires of Wall Street and the average American citizen.

"Typically, we have different income groups," Ghossoub said. "The low-income groups hold mainly assets like cash, which comes from their salaries, whereas the richer groups have more money to invest in many different assets."

Ghossoub studied financial systems all over the world to understand the relationship between and inflation, which is the rising or falling value of money. He found that as a system grows and develops, income inequality tends to rise because people are becoming wealthier while many are remaining poor. However, the size of the country's is also a major factor.

"An economy with a large, active stock market leads to less income inequality compared to one with a smaller stock market," Ghossoub said. "A stock market promotes capital formation, which leads to higher wages and a healthier economy."

Still, the rich benefit from the strength of the stock market as the poor continue to rely solely on their own income, which could be significantly weakened with rising inflation, because their money is worth less. In countries like Mexico, with a smaller stock market but higher inflation, income inequality has a more damaging effect on the populace.

"Normally we associate income inequality with poverty," Ghossoub said. "There's always this feeling of unfairness. If you're rich, you have the resources to defend your interests, but the poor are left behind. If income inequality becomes a larger problem, it can lead to social unrest."

He notes, however, that as long as a nation's economy is moving forward, positive effects will follow.

"Central banks should focus on stabilizing prices to mitigate the effects of financial development on income inequality. When we have financial development, everyone is going to benefit," Ghossoub said. "Some people are always going to benefit more, but as the economy advances the welfare of everyone is going to rise."


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More information: Edgar A. Ghossoub et al, Financial development, income inequality, and the redistributive effects of monetary policy, Journal of Development Economics (2017). DOI: 10.1016/j.jdeveco.2016.12.012
Citation: New study delves into income inequality and inflation (2017, March 6) retrieved 20 September 2019 from https://phys.org/news/2017-03-delves-income-inequality-inflation.html
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Mar 12, 2017
"When we have financial development, everyone is going to benefit" Huh? What does that mean to anyone except the person who said it? It says to me, "let the banks make their businesses bigger and everyone wins". Not!! The bigger the banks get, the less money there is left in the "pool" for everyone else so guess what, they print more money (inflation) so we are all supposed to feel better. The head of the US federal reserve bank Janet Yellen claimed "some call it a ponzi scheme" but insists its the "new economy". No Janet, it really is a "ponzi scheme" and we're all being taken for a ride.

Mar 12, 2017
Before Reagan started his tax cuts for the rich, the National Debt went from LESS than one trillion dollars to almost being tripled in only eight years, while he lied to the people. We all found what really trickles down.

Since then, we had the multiple Bush Wars, while still in deficit spending because ot tax breaks. What is the Republican National Debt now?

So, realizing the situation, the conservatives gave themselves bigger tax breaks. In fact, we have had nothing but rich-people tax breaks as far as the National Debt can go.

Cancel all the rich-folk tax breaks, including the subsidies for Unearned Income, with their ridiculously-low rate for Capital Gains, coddling the uber-rich.

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