The effect of inflation on income inequality in developing economies: Empirical evidence

Abstract

Inflation is a controversial topic among economists because, on the one hand, it increases the cost of living, leading to social instability, but on the other hand, it increases savings - investments and improves capital accumulation for the development of the private sector, leading to economic growth and development. Meanwhile, income inequality is one of the eight-millennium goals that most developing economies are facing because severe inequality can lead to political instability. Does inflation enhance income inequality? This paper looks for the answer by employing the difference GMM Arellano-Bond estimators to study the effect of inflation on income inequality for a balanced panel dataset of 35 developing economies between 2002 and 2021. The results show that inflation increases income inequality. Furthermore, public spending, economic growth, and unemployment are significant determinants of income inequality in these economies. The findings in this paper suggest some crucial implications for developing economies in controlling inflation to limit the increase in income inequality.