Essays on financial institutions, inflation and inequality
The first essay takes a political economy perspective to explain differences in inflationary performance in the post communist economies. It is argued that these differences largely result from political choices rather than structural differences. Based on empirical evidence we describe some institutional mechanisms that can prevent reversal of stabilisation policies after a change of government. The second essay uses an overlapping generations model of money to analyse what the consequences are, for the distribution of real assets and inflation, of having more than one agent extracting seigniorage. As described in the first essay uncoordinated monetary policy caused continued high inflation in some transitional economies. Here it is shown how Russia's inflationary performance after liberalisation can be explained by our model. The third essay uses a moral hazard framework to derive a testable hypothesis linking the degree of inequality and the volume of financial intermediation. This link is part of the transmission mechanism running from inequality via the financial sector to real growth in some recent models of economic development. We test the hypothesis using a new World Bank data set on inequality and find only partial support for the moral hazard model in the data. The fourth essay uses a random matching framework to model a financial market without intermediation. The economic consequences of this are analysed and it is shown that in the search economy the dispersion of project returns can affect the growth rate. This is not the case in the intermediated economy where only the mean of the project return distribution matters for growth.