Inequality in developing economies: The role of institutional development

In the present paper we study the distributive impact of institutional change in developing countries. In such economies, economic institutions, such as property rights systems, may act to preserve the interests of a rich minority, but this depends crucially on the level of political equality. For example, dominant classes can control key-markets, access to assets and investment opportunities, especially if they enjoy disproportionate political power. We test this hypothesis using cross-section and panel data methods on a sample of low- and middle-income economies from Africa, Asia and Latin America. Results suggest that: (a) increasing the protection of property rights increases income inequality; (b) such an effect is larger in low-democracy environments; (c) a minority of countries have developed a set political institutions capable of counterbalancing this effect.Inequality, developing economies, institutions, property rights, democracy

Households Forming Inflation Expectations: Who Are the 'Active' and 'Passive' Learners?

Recent research has established that households learn from professional forecasters as they form their inflation expectations. Professionals forecasts are transmitted, or ‘absorbed’, throughout the population slowly but eventually. This provides the microfoundations for ‘sticky information expectations’. The present paper considers whether absorption rates take place heterogeneously amongst households. We consider whether various segments of the population absorb the professional’s forecasts at different rates. Using a unique survey-based dataset covering various segments of the UK population we identify ‘active’ and ‘passive’ learners in the population. ‘Active’ and ‘passive’ learners are identified and distinguished by their respective absorption rates. The present analyses also consider whether these absorption rates are non-linear

Household Inflation Expectations: Information Gathering, Inattentive or ‘Stubborn’?

The purpose of this paper is to investigate the microfoundations of how non-experts’ (or general public) form inflation expectations. Using a unique dataset we investigate the range of near rational inflation expectations. An important contribution to understanding how non-experts form their expectations is ‘sticky information expectations’, specifically the epidemiological model. Our analysis uses an extended version of the epidemiological model. We find that the general public are best depicted as those who are either information gathers or inattentive. In addition, the inattentive general public can be either forward-looking or ‘stubborn’, that is persistent

Do Households Anchor their Inflation Expectations? Theory and Evidence from a Household Survey

The purpose of the present paper is to study how households form inflation expectations. Using a novel survey-base dataset of Italian households’ opinions of inflation we investigate two separate, but related, types of behavior: ‘inattentiveness’ and ‘anchoring’. The present analysis extends the existing literature by incorporating explicitly inflation targets and distinguishing between aggregate and disaggregate dynamics based on demographic groups. In addition, we extend the literature by considering both the short- and long-run dynamics as households update their inflation expectations while also accounting for their state-varying behavior. All these issues provide important insights into understanding actual inflation dynamics and the conduct of monetary policy

Household income expectations: The role of income shocks and aggregate conditions

We conduct an empirical investigation to examine how income shocks and aggregate conditions influence income expectations, expectation uncertainty and expectation errors. We use data from a large longitudinal Dutch survey collecting detailed information on household income expectations. Our results show that income shocks, much more than aggregate conditions, induce a revision in income expectations across the entire spectrum of the income distribution. This expectation revision is consistent with an extrapolative behavior. We also observe that positive income shocks lead to an increase of expectation uncertainty. Our results partly confirm overreaction of respondents to income shocks, particularly for negative income shocks and high-income respondents. The above overall findings vary conditional on the position in the income distribution. This evidence may depend on different income processes and different degrees of awareness regarding the impact of income shocks and aggregate conditions

Inequality in Developing Economies: The Role of Institutional Development

This paper studies the distributive impact of institutional change in developing countries. In such economies, property rights systems may preserve the interests of an influential minority, who can control key-markets, access to assets and investment opportunities, especially if they enjoy disproportionate political power. We test this hypothesis using cross-section and panel data methods on a sample of low- and middle-income economies from Africa, Asia and Latin America. Results suggest that: (a) increasing property rights protection increases income inequality; (b) this effect is larger in low-democracy environments; (c) few countries have developed political institutions capable of counterbalancing this effect.Inequality, developing economies, institutions, property rights, democracy.

Democracy, State Capacity and Public Finance

The purpose of this paper is to consider the determinants of state capacity investments and public finance in societies with different intensities of democracy. Specifically, we consider the implications of political (dis)parity between the political parties as well as voter groups for state capacity investments, public goods provision, preferential tax policies between the elites and citizens, and the ability of the incumbent government to accrue political rents. The paper provides a unified framework to study the direct and indirect effects of democracy by combining state capacity investment and probabilistic voting. Paradoxically, while stronger electoral contestability leads to higher public good provision and lower political rents, it deteriorates the incumbent’s incentive to invest in state capacity. Similarly, when increased political inclusivity between the voters leads to higher public good provision and lower political rents, it will have a negative effect on state capacity. Conversely, if the effect of inclusivity on state capacity investment is positive, then public good provision will decline

Professionals inflation forecasts: the two dimensions of forecaster inattentiveness

This article explores professionals’ inflation forecasts, specifically the structure of their forecast error. Recent papers considering professionals’ inflation forecast have focused on the role of forecaster inattentiveness. We consider a new additional dimension of inattentiveness which is observed when forecasters form multi-period forecasts, and implicitly their perceived momentum of inflation. The present analysis introduces a novel model that is investigated empirically using survey-based data for the US. It establishes a new structure for the professionals’ forecast error accounting for both dimensions of inattentiveness, which relates respectively to forecast updating and multi-period forecasting in each period