Income Inequality and Aggregate Demand: An Empirical Evidence from Nigeria Digitalized Economy

Abstract

Income inequality has been so much evident in the last four decades as the rich are accumulating more wealth than the poor leading to changes in output, consumption, and employment. However, the concern in recent times of digitalized economies has been its effects on macroeconomic activities through the aggregate demand channel. This study examines the impact of income inequality on aggregate demand in Nigeria, the study data were gathered from the World Bank from 1985 to 2020. The study incorporates infant mortality rate and life expectancy as control variables while the Dynamic Ordinary Least Square (DOLS) was adopted as the method of estimation. The study's descriptive analysis shows that the variables are integrated at I(0) and I(1) while the DOLS result shows that income inequality, inflation, and life expectancy have a negative impact and significant relationship on aggregate demand. The study results also show a long-run relationship among the variables and it was thus concluded that increasing income inequality in Nigeria is detrimental to aggregate demand. The study recommends that government should increase its spending on social services, ensure direct transfer services to the poor and target fiscal and monetary policies that are inequality reduction driven.