A Study on Growth, Inflation and Inequality

The thesis is a collection of three empirical essays on growth, inflation and income inequality. The first essay examines the relationship between inflation level, inflation volatility and economic growth for 92 countries for the period 1982 - 2007 using the system GMM estimator. By this approach I am able to deal with the problems of endogeneity and collinearity among the variables. The results suggest that both inflation level and volatility negatively affect economic growth. Surprisingly, their effect on economic growth is very small. Panel VAR approach further certifies these findings. The results also confirm that even in the absence of inflation volatility, inflation level reduces economic growth. The second essay investigates whether political instability leads to volatile inflation using a panel of 49 African countries and 35 countries from the rest of the world for the period 1985-2009. This study uses novel measures of political instability, particularly the state failure index and state fragility index, and a novel measure of inflation volatility constructed as the conditional variance of inflation estimated from the GARCH (1,1) model. Adopting the system-GMM estimator the study documents a significant positive effect of political instability on inflation volatility. This effect is more pronounced and robust in Africa than in the rest of the world. Chapter 4 examines the moderating effect of inflation on the financial development-income inequality nexus. Using a panel data of 60 countries over the period 1980-2009 and applying a two-step GMM estimator the study finds that financial development reduces income inequality. Nevertheless, the gains from financial development are offset by inflation. The results are robust to different measures of financial development, different estimators and sample sizes.