Inflation and Income Inequality in Developed Economies
CEP Working Paper Series
30 Pages Posted: 4 Jun 2014
Date Written: June 2, 2014
This paper explores the empirical link between income inequality and inflation in ten OECD countries over the period 1971 to 2010. In addition to inflation, we include six control variables in our analysis: economic development level, business cycles, unemployment, unionization, openness to international trade and skill-biased technological change. We estimate the empirical link between all seven variables and income inequality with a balanced panel. We find a U-shaped link between long-run inflation and income inequality. Low inflation rates are associated with higher income inequality. As inflation goes up, inequality decreases, reaches a minimum with an inflation rate of about 13%, and then starts rising again. The precise mechanisms that lead more inflation to correlate with a decrease in income inequality until a certain threshold are unclear yet, and warrant further research.
Keywords: Inflation, Income inequality
JEL Classification: D63, E31, E52
Suggested Citation: Suggested Citation