Income Inequality and Inflation in Developing Countries: An Empirical Investigation

The main aim of this study is to analyze the relationship between income inequality and inflation in 46 Developing countries for the period 2000 to 2012 using dynamic panel data methodology. The GINI coefficient has been used to measure the income inequality while the inflation rate, the growth rate, the unemployment level, the openness of the economies and the variables of governance have been used as independent variables. Contrary to the more previous studies, we test for a non-linear effect of inflation on income inequality. Using GMM estimator to address endogeneity issues, the econometric results support the hypothesis that there is a non-linear relationship between inflation and income inequality and inflation has a positive significant effect on income inequality. Higher inflation is associated with higher income inequality. As inflation goes up, inequality increases, reaches a maximum with an inflation rate of about 109%, and then starts decreasing again. Further, the paper examines through graphical analysis the channels of causality underlying the relationship between inflation and income inequality. The graphical analysis shows the consistency of the data with the hypothesis according to which openness, GDP per capita and political stability mediate the effect of inflation on income inequality.