The IUP Journal of Applied Economics
Nexus Between Inequality, Liquidity and Interest Rate: An Empirical Examination

Article Details
Pub. Date : Oct, 2023
Product Name : The IUP Journal of Applied Economics
Product Type : Article
Product Code : IJAE011023
Author Name : Margaret Rutendo Magwedere and Godfrey Marozva
Availability : YES
Subject/Domain : Economics
Download Format : PDF Format
No. of Pages : 16



Reducing inequalities is a priority in the United Nations' Sustainable Development Goals (SDGs), and it is an ongoing socioeconomic issue. Using low and mediumincome countries as sample, this study seeks to find out whether liquidity affects income inequality. System generalized method of moments was employed to analyze annual panel data from 2005 to 2021, for 37 African countries. All things equal, there is an inverse relationship between liquidity and income inequality. The findings of the study suggest that lower interest rates increase, rather than reduce, income inequality. The policy implication is that income inequality is not just a distributional phenomenon as it is shaped by other macroeconomic fundamentals.


In most developing countries, inequality is a challenge that slows down the attainment of the United Nations' Sustainable Development Goals (SDGs). Although goal 10 of reducing income inequality is a priority under SDGs, wealth and income inequality in developing countries remains a challenge (UN, 2015). Income inequality between countries is on a downward trend, but reducing inequality within countries remains a challenge. Irrespective of the redistributional policies to address the challenge of inequality, the level of inequality in developing countries is very persistent. The pandemic resulted in liquidity injection into the economy as government benefits were rolled out to support the poor, and unconventional monetary policies were followed to support liquidity availabilities in the market and keep companies afloat. The liquidity support and injection in global markets are this study's motivation to empirically establish the impact of liquidity on inequality. It is argued that the liquidity injected by the sovereign states offers a liquidity ladder to save poor households from declining incomes (IMF, 2020).