Is inflation regressive or progressive? Long run & short run evidence from Pakistan
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Date
2010
Journal Title
Journal ISSN
Volume Title
Publisher
International Journal of Management Studies
Abstract
The present paper investigates an answer to a key question “is inflation regressive or progressive?” by utilizing time series data from 1971 up to 2005 with reference to Pakistan. The main focus of the study is on the infl ationinequality puzzle but other control variables are also included in the model that aff ect income distribution. We have utilized the most advanced technique
FMOLS (Fully-Modifi ed Ordinary Least Square) for long run and ECM
(Error Correction Model) for short run dynamics. Our fi ndings suggest
that infl ation is progressive in the case of Pakistan but with low magnitude.
There is also a prevalence of a U-shaped relationship between infl ation and
income inequality in non-linear or non-monotonic phenomenon, but it is
insignifi cant. Per capita income deteriorates income distribution, and seems
to provide gains to non-poor individuals in the economy. Remitt ances as share
of GDP, and human capital, also appear to increase income inequality in both
periods but large size of the government seems to worsen income distribution
in the long run. International trade and income inequality are positively
correlated that confi rms the existence of Leontief paradox in Pakistan not only in short run, but also in long run. Financial development declines income inequality insignifi cantly. Inverted U-shaped curve (Lafer-Curve) indicates an association of trade and income inequality in non-linear fashion insignifi cantly. This eff ort provides some new insights for policy makers and development planners in Pakistan.
Description
Keywords
Inflation, Inequality, Poverty
Citation
International Journal of Management Studies, 17 (2), 47–72, 2010