2. Income Inequality and GDP Growth Nexus in South Africa: Does the 4.5% Consumer Price Inflation Threshold and Other Channels Play a Role?

Evidence indicates that positive income inequality shocks significantly lower GDP growth. Maintaining inflation below the 4.5 % threshold minimizes the adverse effects of positive income inequality shocks on GDP growth. In addition, evidence from the counterfactual analysis indicates the adverse effects of income inequality shocks on GDP growth are exacerbated by elevated economic policy uncertainty, depressed employment, weakening investment, especially residential and nonresidential investment. These findings imply the need for certainty in economic policy to avert exacerbating the adverse effects of positive income inequality shocks on GDP growth. Second, policymakers should implement policy initiatives that should reduce income inequality for a long time rather than transitorily.