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

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.