Inequality and Growth: A Heterogeneous Approach

By Francesco Grigoli, Evelio Paredes, Gabriel Di Bella

December 16, 2016

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Francesco Grigoli, Evelio Paredes, and Gabriel Di Bella. Inequality and Growth: A Heterogeneous Approach, (USA: International Monetary Fund, 2016) accessed December 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The combination of stagnant growth and high levels of income inequality renewed the debate about whether a more even distribution of income can spur economic activity. This paper tests for cross-country convergence in income inequality and estimates its impact on economic growth with a heterogeneous panel structural vector autoregression model, which addresses some empirical challenges plaguing the literature. We find that income inequality is converging across countries, and that its impact on economic growth is heterogeneous. In particular, while the median response of real per capita GDP growth to shocks in income inequality is negative and significant, the dispersion around the estimates is large, with at least one fourth of the countries in the sample presenting a positive effect. The results suggest that the negative effect is mainly driven by the Middle East and Central Asia and the Western Hemisphere across regions, and emerging markets across income levels. Finally, we find evidence that improved institutional frameworks can reduce the negative effect of income inequality on growth.

Subject: Education, Income distribution, Income inequality, Income shocks, National accounts, Personal income

Keywords: Economic growth, Gini, Gini measurement, Growth, Growth rate, Heterogeneity, Income distribution, Income inequality, Income inequality growth, Income level, Income levels, Income shocks, Market Gini index, Middle East and Central Asia, Net Gini index, Null hypothesis, Personal income, Redistribution income, Regions, Western Hemisphere, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/244
Stock No:

WPIEA2016244
ISBN:

9781475560527
ISSN:

1018-5941

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