Prague Economic Papers 2025, 34(2):250-277 | DOI: 10.18267/j.pep.890

Policy uncertainty, inflation, and income inequality nexus: Does financial development matter?

Margaret Rutendo Magwedere ORCID..., Godfrey Marozva ORCID...
Margaret Rutendo Magwedere: Corresponding Author, University of South Africa, School of Economics and Financial Sciences, Department of Finance, Risk Management and Banking, 1 Preller Street Mucklenuek, Pretoria, South Africa
Godfrey Marozva: University of South Africa, School of Economics and Financial Sciences, Department of Finance, Risk Management and Banking, 1 Preller Street Mucklenuek, Pretoria, South Africa

Reducing income inequality is one of the goals under the Sustainable Development Goals. This study examines the intricate relationship between financial development, policy uncertainty, inflation, and income inequality. Panel data for African countries covering the period 2000-2022 were used in the analysis. The study used the economic policy uncertainty (EPU) index to examine its effects on income distribution. Previous studies indicated the possibility of asymmetric effects of inflation and EPU on income inequality. Hence, a dynamic non-linear Panel ARDL was employed to examine the asymmetric nature of the relationship between these variables. The study found that in the long run a symmetric EPU reduces income inequality for the countries in the study and this is confirmed by the asymmetric negative EPU that had a negative and significant impact on inequality. Income equality was found to deteriorate with an increase in inflation. Moreover, inequality was found to be more sensitive to negative changes in inflation relative to a positive change as inequality's elasticity to positive change was much lower as compared to negative changes. Under certain conditions and economic context, redistributive policies can alleviate inequality during a period of heightened EPU. By examining the theoretical frameworks and empirical evidence, the study highlights that for the countries in this study, policy uncertainty reduces inequality. Also, countries should continue with inflation targeting policies and if possible, aim for a lower rate relative to the previous period.

Klíčová slova: inequality, policy uncertainty, inflation, financial development, autoregressive distributed lags, partial sums, structural breaks, asymmetric
JEL classification: C22, C23, D80, O16

Vloženo: 3. prosinec 2024; Revidováno: 1. květen 2025; Přijato: 14. květen 2025; Zveřejněno: 12. červenec 2025  Zobrazit citaci

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Rutendo Magwedere, M., & Marozva, G. (2025). Policy uncertainty, inflation, and income inequality nexus: Does financial development matter? Prague Economic Papers, 34(2), 250-277. doi: 10.18267/j.pep.890
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