EXAMINING THE RELATIONSHIP BETWEEN INCOME INEQUALITY AND INFLATION: A PANEL DATA ANALYSİS ON DEVELOPED AND DEVELOPING COUNTRIES

Abstract

In quantitative studies on income inequality, it is very important to examine the effects of macroeconomic factors that may cause inequality and to determine an appropriate income distribution policy in this direction. In the majority of the literature, these factors are found as financial factors such as taxes, public expenditures etc. However, uncertainty still prevails in the literature about the effect of monetary factors, which are described as indirect determinants, on income inequality. One of these is inflammation. The main argument for the relationship between income inequality and inflation is that the increase in inflation rates decreases the purchasing power of low income groups and thus results in an increase in inequality. This property of the relationship can be regarded as one of the assumptions. However, there are redistribution channels that can cause income inequality to increase / decrease according to the levels of inflation, the position of economic agents in the markets, the nature of the income, various income groups, expectations etc. The aim of the study, conducted in the light of this information, is to examine the effect of inflation on income inequality according to developed and developing country groups and to determine the channels through which it redistributes income. According to the fixed and coincidental effects estimators for a total of 35 countries, 17 developed and 18 developing countries, the correlation coefficient value of the relationship between income inequality and inflation in both country groups is negative. In other words, increasing inflation rates decrease income inequality. However, its effect level is very low. According to these findings, it has been seen that "inflation" is not a significant determinant for income distribution policies.