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Income Inequality and Growth Volatility

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Author Info

  • László Kónya

    ()
    (Department of Economics and Finance, La Trobe University)

  • Chris Mouratidis

    (Victorian Department of Treasury and Finance)

Abstract

The aim of this paper is to study the potentially simultaneous relationship between income inequality and growth volatility for seventy countries between 1960 and 2002. We start with the revision of the relevant literature, with special regards to the papers that most strongly motivated our research, Iyigun and Owen (2004) and Breen and Garcia-Pealosa (2004). Then, we perform two types of analysis; a cross-sectional analysis based on country averages of all available annual observations, and a panel-data analysis with fixed effects based on 6 - year averages. The cross-sectional and panel estimation results are markedly different. In the first case, there seems to be a mutual relationship between inequality and volatility across countries, but several significant coefficients have illogical signs. In the second case, there is no evidence of simultaneity within a country; inequality seems to be influenced by volatility, but inequality does not have a direct effect on volatility. Given the limitations of the cross- sectional analysis, we believe that the simultaneous relationship found in the cross-sectional model is rather spurious than real.

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Bibliographic Info

Paper provided by School of Economics, La Trobe University in its series Working Papers with number 2005.01.

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Length: 26 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:ltr:wpaper:2005.01

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Web page: http://www.latrobe.edu.au/economics
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Keywords: income inequality; GDP growth volatility; panel data EDIRC Provider-Institution: RePEc:edi:smlatau;

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  1. Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc.
  2. Alesina, Alberto F & Rodrik, Dani, 1991. "Distributive Politics and Economic Growth," CEPR Discussion Papers 565, C.E.P.R. Discussion Papers.
  3. Robert J. Barro & Jong-Wha Lee, 2000. "International Data on Educational Attainment Updates and Implications," NBER Working Papers 7911, National Bureau of Economic Research, Inc.
  4. Checchi, Daniele & Garcia-Penalosa, Cecilia, 2004. "Risk and the distribution of human capital," Economics Letters, Elsevier, vol. 82(1), pages 53-61, January.
  5. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  6. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank.
  7. 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.
  8. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
  9. Garcia-Penalosa, Cecilia & Aghion, Philippe & Caroli, Eve, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Economics Papers from University Paris Dauphine 123456789/10091, Paris Dauphine University.
  10. Philippe Aghion & Abhijit Banerjee & Thomas Piketty, 1999. "Dualism And Macroeconomic Volatility," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1359-1397, November.
  11. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  12. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  13. Davidson, Russell & MacKinnon, James G., 1989. "Testing for Consistency using Artificial Regressions," Econometric Theory, Cambridge University Press, vol. 5(03), pages 363-384, December.
  14. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  15. Durlauf, Steven N., 1994. "Spillovers, stratification, and inequality," European Economic Review, Elsevier, vol. 38(3-4), pages 836-845, April.
  16. Caroli, Eve & Garcıa-Penalosa, Cecilia, 2002. "Risk aversion and rising wage inequality," Economics Papers from University Paris Dauphine 123456789/7307, Paris Dauphine University.
  17. Cecilia Garcia-Penalosa & Stephen Turnovsky, 2003. "Production Risk and the Functional Distribution of Income in a Developing Economy: Tradeoffs and Policy Responses," Working Papers UWEC-2002-07-P, University of Washington, Department of Economics, revised Oct 2003.
  18. Abhijit V. Banerjee & Esther Duflo, 2000. "Inequality and Growth: What Can the Data Say?," NBER Working Papers 7793, National Bureau of Economic Research, Inc.
  19. Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
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