The Nonlinear Effect of Inflation on Income Inequality (Developing-Countries Study)

Abstract

Income inequality is an important economic issue that many countries around the world face. In recent decades, due to the increasing trend of income inequality and its adverse effects on the economy of each country, this issue and the factors affecting it have been considered by researchers and economic policymakers. Given the importance of this issue, this article examines the impact of inflation on income inequality in 66 developing countries, including Iran during the period 1995-2018. Dynamic panel data model and generalized method of moments (GMM) have been used to investigate the issue. The results show that there is a nonlinear U-shaped relationship between total inflation and income inequality; That means, when inflation starts to rise from zero, income inequality decreases to the threshold of total inflation (the threshold of total inflation In this study, about 12/07 has been obtained.), And after reaching the inflation threshold with increasing inflation, income inequality also increases. Therefore, there is a nonlinear U-shaped relationship between total inflation and income inequality. Regarding the relationship between the components of inflation and income inequality, the results of the model show a U-shaped nonlinear relationship between projected inflation and income inequality, but unforeseen inflation has no significant relationship with income inequality. The results also show that increasing per capita GDP and urbanization improves income inequality and increasing them will improve the situation of income inequality, but increasing international trade freedom in the countries studied worsens the situation of income inequality. No significant relationship was found between unemployment and income inequality.

Keywords

• inflation
• income inequality
• gini coefficient
• dynamic panel data