The effect of inflation on income inequality: Evidence from a non-linear dynamic panel data analysis in indonesia

Uspri, B.; Karimi, S.; Indrawari, I.; Ridwan, E.

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Decision Science Letters

ISSN 1929-5812 (Online) - ISSN 1929-5804 (Print) Quarterly Publication Volume 12 Issue 3 pp. 639-648 , 2023

The effect of inflation on income inequality: Evidence from a non-linear dynamic panel data analysis in indonesia Pages 639-648 Download PDF

Authors: Betty Uspri, Syafruddin Karimi, Indrawari Indrawari, Endrizal Ridwan

DOI: 10.5267/j.dsl.2023.4.001

Keywords: Inequality, Inflation, Gini Index, Generalized Method of Moment (GMM), Indonesia

Abstract: This research investigates the impact of inflation on income inequality in Indonesia. This study is part of a comprehensive examination investigating which monetary policy can be utilized to lessen inequality. As a central bank objective, inflation can influence the distribution of income, wealth, and endogenous consumption, hence defining inequality. This study employed dynamic panel data analysis for linear autoregressive data using the generalized method of moments (GMM) for both first differences GMM (FD-GMM or AB-GMM) and system GMM (Sys-GMM or BB-GMM) with regional data from 58 cities in 2010-2020. The Arellano-Bond estimator reveals a positive and statistically significant association between inflation and inequality. When inflation rises, the purchasing power of the poor will decline, while the wealthiest will benefit as their non-cash assets proliferate. This study finds, indirectly, that Indonesia’s monetary policy can play a crucial role in lowering income distribution gaps. As one of the nations with an inflation-targeting framework, the Indonesian Central Bank can target the inflation rate by considering inequality. The ITF becomes the most effective monetary policy for stabilizing prices and promoting economic stability. The ITF reduces income inequality by reducing inflation rates. The study also finds that, similar to other emerging nations, economic growth in Indonesia exacerbates inequality. Poverty can be reduced by increased economic growth, but the positive impact of development on the wealthy is significantly more significant than on the poor. Therefore, economic expansion increases inequality.

How to cite this paper

 Uspri, B., Karimi, S., Indrawari, I & Ridwan, E. (2023). The effect of inflation on income inequality: Evidence from a non-linear dynamic panel data analysis in indonesia.Decision Science Letters , 12(3), 639-648.

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