Economic Freedom and Income Inequality: An Empirical Note for the Post-GFC Period

This study examines the dynamic relationship between economic freedom and income inequality in 148 countries, focusing on the post-Global Financial Crisis (GFC) period. Utilizing the System-GMM estimation methodology to address endogeneity concerns, the research also reveals nuanced patterns in both developed and emerging markets. The analysis identifies a negative and statistically significant effect of the Economic Freedom Index (EFI) and all of its sub-components on income inequality. Our findings reveal three important implications: (i) The effects of sub-indicators are quite close to each other in emerging markets, but differ significantly in developed economies, suggesting that policymakers in developed countries should pay more attention to certain areas of freedom when implementing policies to reduce inequalities. (ii) For all panels, the surprisingly small effects of government size underscores the weak role of government spending in mitigating inequality. (iii) Regulatory efficiency emerges as a key factor in reducing income inequalities, urging policymakers to prioritize improvement in regulatory processes. Overall, this study enriches policiymakers’ understanding and offers actionable insights for addressing global income inequality.