Does the Inflation Rate Below 4.5% Matter for the Distributional Effects of Positive Inflation Shocks on Income Inequality in South Africa?

Abstract

Evidence reveals that income inequality growth declines to positive inflation shocks only when inflation is (1) below 3 % and (2) when it is below 4.5 % threshold level. In addition, employment growth rises significantly and reaches the bigger peak values when inflation is (1) below 3 % and (2) below 4.5 %. Despite, employment growth rising significantly when inflation is within the 3-6 % band or below 6 % threshold, the income inequality growth rises. In addition, evidence reveals that there is a threshold level within the existing inflation target band in which unexpected positive inflation impulses lead to rising GDP growth while reducing income inequality growth. This chapter concludes by examining the relevance of the inflation regime below the 4.5 % threshold in transmitting expansionary fiscal and monetary policy shocks to income inequality growth. The fiscal policy shocks include increased government consumption and income tax cut. The amplification effects by the inflation regime below 4.5 % threshold is bigger to personal income tax cut shocks, followed by government consumption shock. This implies expansionary fiscal policy tools can be used to lower income inequality and the reduction is amplified by inflation when it is below 4.5 % threshold.