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The impact of inflation on income inequality: the role of institutional quality

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  • Chee-Hong Law
  • Siew-Voon Soon

Abstract

The inflation rate has ambiguous effects on income inequality, implying that the effects could be affected by another variable. This paper examines the implication of institutional quality on the relationship between inflation and income inequality. The two-step system generalized method of moment is applied to the unbalanced panel dataset which consists of 4-year non-overlapping average data from 1987 to 2014 for 65 developed and developing countries. The coefficients of inflation and institutional quality indicate that an increase in inflation will worsen income inequality, while better institutional quality will improve income inequality. Meanwhile, the effect of inflation will be mitigated by better institutional quality, suggesting the existence of a mediating effect from institutional quality. On the other hand, the marginal effects suggest that inflation and institutional quality will reduce income inequality. Thus, policymakers are advised to improve the institutional quality as it has a direct as well as an indirect impact on income inequality via its interaction with inflation.

Suggested Citation

  • Chee-Hong Law & Siew-Voon Soon, 2020. "The impact of inflation on income inequality: the role of institutional quality," Applied Economics Letters, Taylor & Francis Journals, vol. 27(21), pages 1735-1738, December.
    • Handle: RePEc:taf:apeclt:v:27:y:2020:i:21:p:1735-1738
    DOI: 10.1080/13504851.2020.1717425
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    Cited by:

    1. Cong Minh Huynh & Nam Hoai Tran, 2023. "Financial development, income inequality, and institutional quality: A multi-dimensional analysis," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(2), pages 2242128-224, June.
    2. Wang, Qi & Weng, Chen, 2024. "Two-way risk: Trade policy uncertainty and inflation in the United States and China," Finance Research Letters, Elsevier, vol. 62(PA).
    3. Saeedeh Behnezhad & Seyed Mohammad Javad Razmi & Seyed Saeed Malek Sadati, 2021. "The Role Of Institutional Conditions In The Impact Of Economic Growth On Poverty," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 14(2), pages 78-85, September.
    4. Huynh, Cong Minh & Le, Quoc Nha, 2022. "A multi-dimensional free market and income inequality in developing Asia: How does the quality of governance matter?," MPRA Paper 112013, University Library of Munich, Germany.
    5. Khanday, Ishfaq Nazir & Tarique, Md., 2023. "Does income inequality respond asymmetrically to financial development? Evidence from India using asymmetric cointegration and causality tests," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    6. Yildirim Beyazit Cicen, 2024. "Decoding Inflation: Role of Institutional Quality in Türkiye Using Advanced Econometric Techniques," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 73(74-1), pages 1-35, June.
    7. Esat Daşdemir, 2022. "A New Proposal for Consumer Price Index (CPI) Calculation and Income Distribution Measurement by Income Groups," Journal of Economy Culture and Society, Istanbul University, Faculty of Economics, vol. 65(65), pages 395-414, June.
    8. Kim, Dong-Hyeon & Lin, Shu-Chin, 2023. "Income inequality, inflation and financial development," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 468-487.
    9. Muhammad Shahid Hassan & Haider Mahmood & Muhammad Ibrahim Saeed & Tarek Tawfik Yousef Alkhateeb & Noman Arshed & Doaa H. I. Mahmoud, 2021. "Investment Portfolio, Democratic Accountability, Poverty and Income Inequality Nexus in Pakistan: A Way to Social Sustainability," Sustainability, MDPI, vol. 13(11), pages 1-16, June.
    10. Rıdvan Karacan & Mehmet Emin Yardımcı, 2024. "Free market economy: Is the market or prices free? Theory and evidence from the United States," American Journal of Economics and Sociology, Wiley Blackwell, vol. 83(1), pages 59-74, January.

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