Inflation and income inequality linkages: do institutions matter?

The effect of inflation on income inequality is uncertain in both theoretical and empirical literature. This article investigates whether institutions matter in this relationship, using the corruption perception index and economic freedom index as representatives. The article focuses on the two-step system generalized method of the moments results from 2012 to 2018 for 58 countries; however, for the sake of comparing results, pooled ordinary least squares, fixed effect estimations and difference generalized method of moments are employed. The findings suggest that inflation has a robust negative effect on income inequality. Good institutions, low corruption and high economic freedom levels lead to income inequality, and their overall effect shows that (i) a decrease in corruption and an increase in economic freedom cause the effect of high inflation turn positive on income inequality, (ii) high inflation rates eliminate good institutions' reducing effect on income inequality. The study contributes to the limited literature on the relationship between inflation and income inequality. It distinguishes itself from the literature by examining the role of institutions in this relationship by using corruption and income inequality together.