The Relationship between the Inflation Rate and Inequality Across U.S. States: A Semiparametric Approach

Abstract

This paper uses a cross-state panel for the United States over the 1976 to 2007 period to assess the relationship between income inequality and the inflation rate. Employing a semiparametric instrument variable (IV) estimator, we find that the relationship depends on the level of the inflation rate. A positive relationship occurs only if the states exceed a threshold level of inflation rate. Below this value, inflation rate lowers income inequality. The results suggest that a nonlinear relationship exists between income inequality and the inflation rate.

Keywords: Income inequality, Inflation rate, Semiparametric instrumental variable estimator

JEL Classification: E31, D31, C14