The Dynamic Nexus between Macroeconomic Factors and Income Inequality: Evidence from Lower-Middle-Income Countries

Income inequality has been a persistent challenge for policymakers worldwide, especially in developing economies. This study aims to explore the dynamics of income inequality in lower-middle-income economies by analyzing the long-run impact of critical macroeconomic factors. Utilizing annual panel data for 18 lowermiddle-income countries from 1996 to 2018, the study employs the Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS). Furthermore, the Pooled Mean Group (PMG) estimator is utilized to validate coefficient estimation. The findings suggest a significant nonlinear linkage between economic growth and income inequality and confirm the Kuznets Curve Hypothesis (KCH) in the selected panel. The findings also substantiate significant long-run positive effects of inflation, trade, and unemployment on income inequality. However, the long-run impact of gross capital formation (GCF) is insignificant. The insights gained from this study could inform policymaking to foster inclusive economic growth and reduce income disparities within lower-middle-income economies.