Inflation as a transmission channel for real income growth in emerging economies

Abstract

This study examines the structural and macroeconomic determinants of real GDP per capita across 31 emerging economies over the period 2000–2024, with particular emphasis on the role of inflation as a transmission mechanism linking socioeconomic and macroeconomic conditions to income outcomes. The analysis employs a balanced panel dataset and integrates fixed-effects estimation, mediation modelling, panel cointegration techniques, Pooled Mean Group (PMG-ARDL), and robustness checks using FMOLS, DOLS, and System GMM. The results indicate that education and industry value added are consistently associated with higher real GDP per capita, while inflation exhibits a negative relationship with income across multiple specifications. Employment and foreign direct investment show mixed and model-dependent effects, suggesting that their contributions to income are influenced by productivity conditions, absorptive capacity, and dynamic adjustments. Mediation analysis provides evidence that inflation operates as a selective transmission channel, with statistically significant indirect effects observed primarily for employment and population growth, while other variables show limited mediation through inflation. The findings are robust to alternative estimation techniques and supported by panel unit root, cointegration, and diagnostic tests. Overall, the study highlights that improvements in real income in emerging economies depend not only on structural factors such as human capital and industrialisation but also on macroeconomic stability and the conditions under which these factors translate into sustained income gains. The study contributes to the literature by integrating multiple theoretical perspectives within a comprehensive empirical framework and offers policy-relevant insights for managing growth and inflation trade-offs.