Abstract
The present paper investigates an answer to a key question “is inflation regressive or progressive?” by utilizing time series data from 1971 up to 2005 with reference to Pakistan. The main focus of the study is on the inflation-inequality puzzle but other control variables are also included in the model that affect income distribution. We have utilized the most advanced technique FMOLS (Fully-Modified Ordinary Least Square) for long run and ECM (Error Correction Model) for short run dynamics. Our findings suggest that inflation is progressive in the case of Pakistan but with low magnitude. There is also a prevalence of a U-shaped relationship between inflation and income inequality in non-linear or non-monotonic phenomenon, but it is insignificant. Per capita income deteriorates income distribution, and seems to provide gains to non-poor individuals in the economy. Remittances as share of GDP, and human capital, also appear to increase income inequality in both periods but large size of the government seems to worsen income distribution in the long run. International trade and income inequality are positively correlated that confirms the existence of Leontief paradox in Pakistan not only in short run, but also in long run. Financial development declines income inequality insignificantly. Inverted U-shaped curve (Lafer-Curve) indicates an association of trade and income inequality in non-linear fashion insignificantly. This effort provides some new insights for policy makers and development planners in Pakistan. Keywords: Inflation; inequality; fully modifed ordinary least square; Pakistan.
Highlights
The purpose of present paper is two fold: first, to investigate the linear relationship between inflation and income inequality which tells us “whether inflation is progressive or regressive” and second, to analyze the existence of non-linear association between the said variables1
Where inflation is represented by (IFL), income inequality by Ginicoefficient (GINI), while CV means control variables in the model such as real per capita income (GDPC), government expenditures as share of GDP (GSC), manufacturing value-added as share of GDP (M), secondary school enrollment (SEC) proxy for human capital, investment as share of GDP (INV), remittances as share of GDP (REM), trade openness as share of GDP (TRADE) and financial development by M2 as share of GDP (M2)
The present study appears to be an initial attempt to identify the links between inflation and income inequality in the case of a small developing economy like Pakistan, we empirically estimate whether a statistically significant relationship exists between measure of inflation and income distribution in the long run as well as in the short run
Summary
The purpose of present paper is two fold: first, to investigate the linear relationship between inflation and income inequality which tells us “whether inflation is progressive or regressive” and second, to analyze the existence of non-linear (non-monotonic) association between the said variables1. In the case of Brazil, Bittencourt (2006) shows that inflation is having regressive and significant impact on income inequality and argues that any possible gain coming from the debtor and creditor channel offsets by the poor performance, combines with incomplete access to financial goods and lower bargaining power regarding earning indexation8.
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