(African Economic Research Consortium, 2024-04-10) Mbara, Gilbert
We investigate the notable decline in wealth and income inequality in Kenya over the 10-year period between 2005 and 2015. Using a calibrated continuous time heterogeneous agent model, we attribute up to 92% of the variation in top wealth inequality to a persistent but slow increase in the return to capital, a low risk free rate, and rising “effective” income tax rates. Our study suggests that a macroeconomic environment characterized by low risk-free interest rates anchored by low debt-to fiscal revenue ratios are key to reducing both wealth and income inequality.