IDEAS home Printed from https://ideas.repec.org/a/hpe/journl/y2016v217i2p37-66.html
   My bibliography  Save this article

Interrelation among Economic Growth, Income Inequality, and Fiscal Performance: Evidence from Anglo-Saxon Countries

Author

Listed:
  • Karen Davtyan

    (University of Barcelona)

Abstract

The interrelation among economic growth, income inequality, and fiscal performance is very complex. The objective of this paper is to analyze the dynamic interrelations among these variables using struc¬tural VAR models and to examine transmission channels among them. The empirical analysis is imple¬mented for the UK, the USA, and Canada, using the longest possible consistently measured compa¬rable data on income inequality. The obtained results show that inequality has a negative effect on growth in the case of the UK while the effect is positive for the USA and Canada. An increase in in¬equality worsens fiscal performance for all the considered countries.

Suggested Citation

  • Karen Davtyan, 2016. "Interrelation among Economic Growth, Income Inequality, and Fiscal Performance: Evidence from Anglo-Saxon Countries," Hacienda Pública Española / Review of Public Economics, IEF, vol. 217(2), pages 37-66, June.
    • Handle: RePEc:hpe:journl:y:2016:v:217:i:2:p:37-66
    as

    Download full text from publisher

    File URL: https://www.ief.es/comun/Descarga.cshtml?ruta=~/docs/destacados/publicaciones/revistas/hpe/217_Art2.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jorge Martínez-Vázquez & Violeta Vulovic & Blanca Moreno Dodson, 2012. "The Impact of Tax and Expenditure Policies on Income Distribution: Evidence from a Large Panel of Countries," Hacienda Pública Española / Review of Public Economics, IEF, vol. 200(1), pages 95-130, March.
    2. Robert C. Feenstra & Robert Inklaar & Marcel P. Timmer, 2015. "The Next Generation of the Penn World Table," American Economic Review, American Economic Association, vol. 105(10), pages 3150-3182, October.
    3. David Castells-Quintana & Vicente Royuela, 2014. "Agglomeration, inequality and economic growth," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 52(2), pages 343-366, March.
    4. Forni, Mario & Gambetti, Luca, 2011. "Testing for Sufficient Information in Structural VARs," CEPR Discussion Papers 8209, C.E.P.R. Discussion Papers.
    5. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(4), pages 1001-1026.
    6. Alesina, Alberto & Perotti, Roberto, 1996. "Income distribution, political instability, and investment," European Economic Review, Elsevier, vol. 40(6), pages 1203-1228, June.
    7. Christophe Kamps, 2005. "The Dynamic Effects of Public Capital: VAR Evidence for 22 OECD Countries," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 533-558, August.
    8. Christophe Ehrhart, 2009. "The effects of inequality on growth: a survey of the theoretical and empirical literature," Working Papers 107, ECINEQ, Society for the Study of Economic Inequality.
    9. Forni, Mario & Gambetti, Luca, 2014. "Sufficient information in structural VARs," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 124-136.
    10. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    11. Milanovic, Branko, 1999. "Do more unequal countries redistribute more? does the median voter hypothesis hold?," Policy Research Working Paper Series 2264, The World Bank.
    12. A. B Atkinson & Andrew Leigh, 2013. "The Distribution of Top Incomes in Five Anglo-Saxon Countries Over the Long Run," The Economic Record, The Economic Society of Australia, vol. 89, pages 31-47, June.
    13. Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 465-490.
    14. Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 115-136, Fall.
    15. Roberto Perotti, 2005. "Estimating the effects of fiscal policy in OECD countries," Proceedings, Federal Reserve Bank of San Francisco.
    16. Martin Larch, 2012. "Fiscal Performance and Income Inequality: Are Unequal Societies More Deficit‐Prone?," Kyklos, Wiley Blackwell, vol. 65(1), pages 53-80, February.
    17. Joshua C. Hall & Robert A. Lawson, 2014. "Economic Freedom Of The World: An Accounting Of The Literature," Contemporary Economic Policy, Western Economic Association International, vol. 32(1), pages 1-19, January.
    18. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    19. Phillips, Peter C. B., 1998. "Impulse response and forecast error variance asymptotics in nonstationary VARs," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 21-56.
    20. Roland Bénabou, 1996. "Inequality and Growth," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 11-92, National Bureau of Economic Research, Inc.
    21. Hongyi Li & Heng‐fu Zou, 1998. "Income Inequality is not Harmful for Growth: Theory and Evidence," Review of Development Economics, Wiley Blackwell, vol. 2(3), pages 318-334, October.
    22. Woo, Jaejoon, 2011. "Growth, income distribution, and fiscal policy volatility," Journal of Development Economics, Elsevier, vol. 96(2), pages 289-313, November.
    23. Lütkepohl,Helmut & Krätzig,Markus (ed.), 2004. "Applied Time Series Econometrics," Cambridge Books, Cambridge University Press, number 9780521547871.
    24. Xavier Ramos & Oriol Roca-Sagales, 2008. "Long-Term Effects of Fiscal Policy on the Size and Distribution of the Pie in the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 29(3), pages 387-411, September.
    25. Leonel Muinelo‐Gallo & Oriol Roca‐Sagalés, 2011. "Economic Growth And Inequality: The Role Of Fiscal Policies," Australian Economic Papers, Wiley Blackwell, vol. 50(2-3), pages 74-97, September.
    26. Mark D. Partridge, 2005. "Does Income Distribution Affect U.S. State Economic Growth?," Journal of Regional Science, Wiley Blackwell, vol. 45(2), pages 363-394, May.
    27. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
    28. Francisco H.G. Ferreira, 2012. "Inequality of Opportunity Around the World: What Do We Know So Far?," World Bank - Inequality in Focus, The World Bank, vol. 1(1), pages 8-11, April.
    29. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-144, January.
    30. Clarke, George R. G., 1995. "More evidence on income distribution and growth," Journal of Development Economics, Elsevier, vol. 47(2), pages 403-427, August.
    31. Laura de Dominicis & Henri L.F. de Groot & Raymond J.G.M. Florax, 2006. "Growth and Inequality: A Meta-Analysis," Tinbergen Institute Discussion Papers 06-064/3, Tinbergen Institute.
    32. Larch, Martin, 2010. "Fiscal performance and income inequality: Are unequal societies more deficit-prone? Some cross-country evidence," MPRA Paper 23496, University Library of Munich, Germany.
    33. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    34. Stephen Knowles, 2005. "Inequality and Economic Growth: The Empirical Relationship Reconsidered in the Light of Comparable Data," Journal of Development Studies, Taylor & Francis Journals, vol. 41(1), pages 135-159.
    35. Banerjee, Abhijit V & Duflo, Esther, 2003. "Inequality and Growth: What Can the Data Say?," Journal of Economic Growth, Springer, vol. 8(3), pages 267-299, September.
    36. King, Robert G. & Rebelo, Sergio T., 1993. "Low frequency filtering and real business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 207-231.
    37. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
    38. Muinelo-Gallo, Leonel & Roca-Sagalés, Oriol, 2013. "Joint determinants of fiscal policy, income inequality and economic growth," Economic Modelling, Elsevier, vol. 30(C), pages 814-824.
    39. Frederick Solt, 2009. "Standardizing the World Income Inequality Database," Social Science Quarterly, Southwestern Social Science Association, vol. 90(2), pages 231-242, June.
    40. Hector Sala & Oriol Roca-Sagalés, 2011. "Government Expenditures and the Growth-Inequality Trade-Off: The Swedish Case," Journal of Income Distribution, Ad libros publications inc., vol. 20(2), pages 38-54, June.
    41. Perotti, Roberto, 1996. "Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-187, June.
    42. Ernest Pytlarczyk, 2005. "An Estimated DSGE Model for The German Economy," Computing in Economics and Finance 2005 318, Society for Computational Economics.
    43. Barro, Robert J, 2000. "Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
    44. Lütkepohl,Helmut & Krätzig,Markus (ed.), 2004. "Applied Time Series Econometrics," Cambridge Books, Cambridge University Press, number 9780521839198.
    45. Pedro Cunha Neves & Sandra Tavares Silva, 2010. "Inequality and Growth: Uncovering the main conclusions from the empirics," FEP Working Papers 381, Universidade do Porto, Faculdade de Economia do Porto.
    46. Laura De Dominicis & Raymond J. G. M. Florax & Henri L. F. De Groot, 2008. "A Meta‐Analysis On The Relationship Between Income Inequality And Economic Growth," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(5), pages 654-682, November.
    47. Li, Hongyi & Zou, Heng-fu, 1998. "Income Inequality Is Not Harmful for Growth: Theory and Evidence," Review of Development Economics, Wiley Blackwell, vol. 2(3), pages 318-334, October.
    48. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September.
    49. Pytlarczyk, Ernest, 2005. "An estimated DSGE model for the German economy within the euro area," Discussion Paper Series 1: Economic Studies 2005,33, Deutsche Bundesbank.
    50. Laxton, Douglas & Pesenti, Paolo & Juillard, Michel & Karam, Philippe, 2006. "Welfare-based monetary policy rules in an estimated DSGE model of the US economy," Working Paper Series 613, European Central Bank.
    51. Martin Larch, 2010. "Fiscal performance and income inequality: Are unequal societies more deficit-prone? Some cross-count," European Economy - Economic Papers 2008 - 2015 414, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    52. Pedro Cunha Neves & Sandra Maria Tavares Silva, 2014. "Inequality and Growth: Uncovering the Main Conclusions from the Empirics," Journal of Development Studies, Taylor & Francis Journals, vol. 50(1), pages 1-21, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sudeshna Ghosh, 2020. "Impact of economic growth volatility on income inequality: ASEAN experience," Quality & Quantity: International Journal of Methodology, Springer, vol. 54(3), pages 807-850, June.
    2. Roli Juliet Egbe & Achoja Roland Onomu & Pius Chinwuba Ike & Isiorhovoja Rodney Akpoviri, 2020. "Growth Analysis and the Determinants of Entrepreneurial Orientation in the Small-Scale Poultry Subsector in Delta State, Nigeria," Asian Journal of Agriculture and rural Development, Asian Economic and Social Society, vol. 10(4), pages 764-772, December.
    3. Bartak, Jakub & Jabłoński, Łukasz & Tomkiewicz, Jacek, 2022. "Does income inequality explain public debt change in OECD countries?," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 211-224.
    4. Kang, Jong Woo, 2015. "Interrelation between Growth and Inequality," ADB Economics Working Paper Series 447, Asian Development Bank.
    5. Gunasinghe, Chandika & Selvanathan, E.A. & Naranpanawa, Athula & Forster, John, 2020. "The impact of fiscal shocks on real GDP and income inequality: What do Australian data say?," Journal of Policy Modeling, Elsevier, vol. 42(2), pages 250-270.
    6. Jeanne Terblanche & Dawie van Lill & Hylton Hollander, 2023. "Fiscal policy and dimensions of inequality in South Africa: A time-varying coefficient approach," Working Papers 05/2023, Stellenbosch University, Department of Economics.
    7. Carrera, Jorge & de la Vega, Pablo, 2021. "The impact of income inequality on public debt," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    8. Jorge Carrera & Pablo De la Vega & Fernando Toledo, 2021. "Income Inequality and Fiscal Policy over the Political Cycle A Panel Estimation Model for Emerging Markets and Developing Economies," Asociación Argentina de Economía Política: Working Papers 4449, Asociación Argentina de Economía Política.
    9. Chandika Gunasinghe & E. A. Selvanathan & Athula Naranpanawa & John Forster, 2021. "Rising Income Inequality in OECD Countries: Does Fiscal Policy Sacrifice Economic Growth in Achieving Equity?," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 33(6), pages 1840-1876, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:ira:wpaper:201405 is not listed on IDEAS
    2. Neves, Pedro Cunha & Afonso, Óscar & Silva, Sandra Tavares, 2016. "A Meta-Analytic Reassessment of the Effects of Inequality on Growth," World Development, Elsevier, vol. 78(C), pages 386-400.
    3. Gründler, Klaus & Scheuermeyer, Philipp, 2015. "Income inequality, economic growth, and the effect of redistribution," W.E.P. - Würzburg Economic Papers 95, University of Würzburg, Department of Economics.
    4. Marrero, Gustavo A. & Rodríguez, Juan G., 2013. "Inequality of opportunity and growth," Journal of Development Economics, Elsevier, vol. 104(C), pages 107-122.
    5. Adalgiso Amendola & Roberto Dell�Anno, 2014. "Income inequality and economic growth: an empirical investigation in Mediterranean countries," RIEDS - Rivista Italiana di Economia, Demografia e Statistica - The Italian Journal of Economic, Demographic and Statistical Studies, SIEDS Societa' Italiana di Economia Demografia e Statistica, vol. 68(2), pages 35-58, April-Jun.
    6. Adnen Ben Nasr & Mehmet Balcilar & Rangan Gupta & Seyi Saint Akadiri, 2018. "Asymmetric Effects of Inequality on Per Capita Real GDP of the United States," Working Papers 201820, University of Pretoria, Department of Economics.
    7. David Castells-Quintana & Vicente Royuela, 2017. "Tracking positive and negative effects of inequality on long-run growth," Empirical Economics, Springer, vol. 53(4), pages 1349-1378, December.
    8. Mikulas Luptacik & Bernhard Mahlberg, 2018. "Revisiting the Efficiency-Equity Trade-off: A Muli-objective Linear Problem combined with an extended Leontief Input Output Model," Department of Economic Policy Working Paper Series 016, Department of Economic Policy, Faculty of National Economy, University of Economics in Bratislava.
    9. Jakub Bartak & Łukasz Jabłoński, 2020. "Inequality and growth: What comes from the different inequality measures?," Bulletin of Economic Research, Wiley Blackwell, vol. 72(2), pages 185-212, April.
    10. Christophe Ehrhart, 2009. "The effects of inequality on growth: a survey of the theoretical and empirical literature," Working Papers 107, ECINEQ, Society for the Study of Economic Inequality.
    11. Gründler, Klaus & Scheuermeyer, Philipp, 2018. "Growth effects of inequality and redistribution: What are the transmission channels?," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 293-313.
    12. Seher Gülşah Topuz, 2022. "The Relationship Between Income Inequality and Economic Growth: Are Transmission Channels Effective?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 162(3), pages 1177-1231, August.
    13. Shinhye Chang & Rangan Gupta & Stephen M. Miller, 2018. "Causality Between Per Capita Real GDP and Income Inequality in the U.S.: Evidence from a Wavelet Analysis," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 135(1), pages 269-289, January.
    14. Mehmet Balcilar & Rangan Gupta & Wei Ma & Philton Makena, 2021. "Income inequality and economic growth: A re‐examination of theory and evidence," Review of Development Economics, Wiley Blackwell, vol. 25(2), pages 737-757, May.
    15. Jorge Alberto Charles Coll, 2014. "Inequality and growth in the context of the Mexican economy: Does inequality matter for growth?," Working Papers 331, ECINEQ, Society for the Study of Economic Inequality.
    16. Ademola Obafemi Young, 2019. "Growth Impacts of Income Inequality: Empirical Evidence From Nigeria," Research in World Economy, Research in World Economy, Sciedu Press, vol. 10(3), pages 226-262, December.
    17. Charles-Coll, Jorge A., 2010. "The optimal rate of inequality: A framework for the relationship between income inequality and economic growth," MPRA Paper 28921, University Library of Munich, Germany.
    18. Gravier-Rymaszewska, Joanna & Tyrowicz, Joanna & Kochanowicz, Jacek, 2010. "Intra-provincial inequalities and economic growth in China," Economic Systems, Elsevier, vol. 34(3), pages 237-258, September.
    19. Marta Simões & João Andrade & Adelaide Duarte, 2013. "A regional perspective on inequality and growth in Portugal using panel cointegration analysis," International Economics and Economic Policy, Springer, vol. 10(3), pages 427-451, September.
    20. Adnen Ben Nasr & Mehmet Balcilar & Rangan Gupta & Seyi Saint Akadiri, 2020. "Asymmetric effects of inequality on real output levels of the United States," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(1), pages 47-69, March.
    21. Brida, Juan Gabriel & Carrera, Edgar J. Sanchez & Segarra, Verónica, 2020. "Clustering and regime dynamics for economic growth and income inequality," Structural Change and Economic Dynamics, Elsevier, vol. 52(C), pages 99-108.

    More about this item

    Keywords

    economic growth; income inequality; fiscal performance; VAR.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hpe:journl:y:2016:v:217:i:2:p:37-66. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Miguel Gómez de Antonio (email available below). General contact details of provider: https://edirc.repec.org/data/iefgves.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.