Inflation-Income Inequality Nexus: Panel Threshold Analysis for Developed and Developing Countries

Most of the studies focusing on the differences between countries in income inequality indicate that the explanatory power of empirical analysis can be increased by including monetary policy variables such as inflation level, inflation level flexibility and interest rate into economic models. Particularly, the distributional effects of inflation have become a major topic. The aim of the study is to analyze the non-linear effects of inflation on income inequality. In this context, panel threshold analysis has been implemented for 40 developed and developing countries in the period of 1993-2019. It is concluded that the aspect of the income inequality is determined by the inflation level. The consumer price index (2010 = 100) has been defined as the inflation indicator, and significant levels with single (49,300) and double (45,000) thresholds have been detected. Besides, estimates have been repeated with another inequality indicator for robustness check and similar results have been obtained. The relationship between inflation and income inequality is in the inverse (negative) aspect below the threshold inflation level and in the same (positive) aspect above it. The analysis confirms the existence of nonlinear effects and contributes to literature samples.