Income Inequality and Growth: Calibration and Simulation for the Kenyan Economy

Abstract We investigate the notable decline in wealth and income inequality in the Kenya over the 10 year period between 2005 to 2015. Using a calibrated continuous time heterogeneous agent model, we attribute up to 80% of the variation in top wealth and income inequality to a persistent but slow increase in the return to capital, a low risk free rate, and rising ‘effective’ income tax rates. Our study suggests that a macroeconomic environment characterised by low risk-free interest rates anchored by low debt-to-fiscal revenue ratios are key to reducing both wealth and income inequality.