Dynamic panel threshold effects of inflation and income inequality nexus in advanced economies

The widening income gap has significantly undermined economic stability in developed and developing nations over recent decades. This critical issue is characterized by policy failure, poor economic governance, and conflicting economic philosophies. Inflation is a key factor influencing income redistribution across social strata; however, its impact on income inequality is seldom analyzed alongside other variables. The present study examines the non-linear effects of inflation on income inequality using interaction terms among the variables. The study used an econometric dynamic panel threshold model, incorporating system generalized methods of moments (GMM) techniques with macroeconomic variable data from 20 advanced economies during the period spanning from 1990 to 2022. The dynamic approach reveals a strong persistence of income inequality over time. Inflation exhibits an inverted U-shaped relationship, where low inflation has a moderate impact on inequality, while high inflation significantly exacerbates it, with a threshold level identified at 4.29. Additionally, government expenditure and trade openness are found to reduce inequality, whereas financial development, under inflationary conditions worsens it. The empirical results indicate the need for a balanced policy approach that stabilizes inflation while promoting inclusive economic growth, effective government spending, and financial inclusion. JEL CLASSIFICATION: E31 D31 C23 H53 F41