The Impact of Inflation on the Income Inequality of Bangladesh: A Time Series Analysis

Abstract

Income inequality has become a major public issue all over the world. Each year the gap between the rich and poor is rising, and the circumstance has turned to be miserable in many countries. This paper investigates the impact of inflation on income inequality using data from the period of 1990 to 2015. The study uses econometric techniques on the time series data. All data are found to be stationary at first difference by using Augmented Dickey-Fuller (ADF) test. The results of Johannsen co-integration test confirm that there is a long-run positive significant relationship among the examined variables. The result shows that if inflation increases by 1%, income inequality increases by 4.99%. The result of the vector error correction model (VECM) shows that inequality requires approximately 0.35% of error correction per year and inflation requires 22.74% of error correction per year to reach equilibrium. The result of the impulse response function indicates that one standard deviation shock from inequality and inflation causes inequality to rise over time. When one standard deviation shock is given to inequality causes inflation to decline after 1.5 years then neutralized after 3.5 years where shock from inflation, inflation becomes negative after two years and neutralized after six years.