The short-term relationship between inflation crises, poverty, and income distribution has been studied extensively in previous literature. Measuring 33 countries worldwide, Powers (1995), found that on average poverty had a negative correlation with inflation in the short-term. Her study concluded that, first, the poor tend to hold a majority of their financial assets in the form of cash rather interest-bearing assets; and second, the poor have less opportunity than the middle or upper classes to protect the real value of their incomes and assets from inflation. Thus, price jumps generally erode the real wages and assets of the poor more than those of the non-poor. Moreover, beyond certain thresholds, inflation contracts output growth, an
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In a study examining the Great Recession and its effects on the U.S. economy, Freeman (2010) found that banking crises are often consistent with higher short-term levels of poverty and income inequality. His research concludes that real wage cuts and reduced working hours are the channels by which the poor are most negatively affected. These crises also affect poverty and income distribution through a variety of other channels, including fiscal retrenchment and relative price change, (Baldacci, de Mello, and Inchauste, 2002). They observe that both fiscal retrenchment and a tighter monetary stance are the most common aspects of policy in response to a banking crisis. As mentioned earlier in the paper, fiscal retrenchment, or spending cuts, often reduce the volume of social services, such as welfare programs, which minimizes the ability of the poor to access these programs. Additionally, real currency depreciation, similar to inflation, increases the price of tradable goods relative to non-tradables, causing higher unemployment in the non-tradable sector (Baldacci et al., 2002). For example, examining the effects of currency devaluation on five African countries , Sahn and Sarris (1997) found that it can increase the price of imported food, which further decreases the purchasing power of the poor. This paper will expand off the study by Baldacci et al. (1997), and will contribute long-term channels of the effects of banking crises on poverty and income
In a study examining the Great Recession and its effects on the U.S. economy, Freeman (2010) found that banking crises are often consistent with higher short-term levels of poverty and income inequality. His research concludes that real wage cuts and reduced working hours are the channels by which the poor are most negatively affected. These crises also affect poverty and income distribution through a variety of other channels, including fiscal retrenchment and relative price change, (Baldacci, de Mello, and Inchauste, 2002). They observe that both fiscal retrenchment and a tighter monetary stance are the most common aspects of policy in response to a banking crisis. As mentioned earlier in the paper, fiscal retrenchment, or spending cuts, often reduce the volume of social services, such as welfare programs, which minimizes the ability of the poor to access these programs. Additionally, real currency depreciation, similar to inflation, increases the price of tradable goods relative to non-tradables, causing higher unemployment in the non-tradable sector (Baldacci et al., 2002). For example, examining the effects of currency devaluation on five African countries , Sahn and Sarris (1997) found that it can increase the price of imported food, which further decreases the purchasing power of the poor. This paper will expand off the study by Baldacci et al. (1997), and will contribute long-term channels of the effects of banking crises on poverty and income