Income Inequality and Inflation Relationship in Selected European Countries: Evidence from PMG-ARDL Model

To explore the dynamics of economic factors, this study undertakes a comprehensive analysis of the inflation and income inequality relationship (IIIR) for selected European countries in the period 2000-2020. By employing both cointegration testing and the Pooled Mean Group (PMG)/Autoregressive Distributed Lag (ARDL) modeling approach, the research sheds light on the short-run and long-run relationships underlying these crucial economic variables. The PMG/ARDL model indicates a significant long-run negative IIIR, consistent across most of the analyzed countries. This suggests that as inflation rises, income inequality tends to decrease in the long term, which may be attributed to various economic mechanisms that redistribute wealth during periods of inflation. However, the short-run analysis did not yield significant results, indicating that the short-run impact of inflation on income inequality might be less pronounced or overshadowed by other economic factors. These insights contribute to a deeper understanding of how inflation influences wealth distribution, with implications for economic policy, particularly in contexts where income inequality is an increasing issue. For policymakers, understanding the long-run inverse IIIR could be instrumental in designing economic policies that aim to mitigate inequality.