Present study is an attempt to analyse the role of macroeconomic instability on income inequality in developing countries. This study investigates the short run and long run relationship between macroeconomic instability and income inequality by using panel data of 22 developing countries over the period 1992-14. For this purpose, comprehensive macroeconomic instability index has been constructed by using principal component analysis with macroeconomic variables including inflation rate, real exchange rate, external debt to GNP ratio and public deficit to GNP ratio. Time-dimension relationship has been analysed by using panel co-integration and pooled mean group estimation techniques. The empirical findings of the study reveal that macroeconomic instability significantly increases income inequality and the relationship appeared to be stable and bi-directional both in the short run and in long run. The study suggests that income inequality can be reduced through macroeconomic stability along with increasing foreign direct investment and public health expenditures in selected developing countries.

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