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Growth and Inequality in a Small Open Economy

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  • Yu-chin Chen

    (University of Washington)

  • Stephen J. Turnovsky

    (University of Washington)

Abstract

This paper analyzes the growth and inequality tradeoff for a small open economy where agents differ in their initial endowments of capital stock and international bond-holdings. Our analysis focuses on the distributional impacts of different structural shocks through their effects on agents’ relative wealth and their labor supply decisions. Supplementing the theoretical analysis with numerical simulations, we demonstrate that openness – access to an international capital market – has important consequences on the growth-inequality tradeoff. Specifically, the growth and distributional consequences of structural shocks depend crucially on whether the underlying heterogeneity originates with the initial endowment of domestic capital or foreign bonds.

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File URL: http://faculty.washington.edu/yuchin/Papers/CT1.pdf
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Bibliographic Info

Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2009-05-FC.

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Date of creation: Sep 2008
Date of revision: Nov 2009
Publication status: Forthcoming in Journal of Macroeconomics
Handle: RePEc:udb:wpaper:uwec-2009-05-fc

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  1. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  2. Caselli, F. & Ventura, J., 1996. "A Representative Consumer Theory of Distribution," Working papers 96-11, Massachusetts Institute of Technology (MIT), Department of Economics.
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  4. M. Fatih Guvenen, 2002. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," RCER Working Papers 491, University of Rochester - Center for Economic Research (RCER), revised Mar 2003.
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  8. Stephen J. Turnovsky, 1999. "Fiscal Policy and Growth in a Small Open Economy with Elastic Labor Supply," Canadian Journal of Economics, Canadian Economics Association, vol. 32(5), pages 1191-1214, November.
  9. Aghion, Philippe & Caroli, Eve & García-Peñalosa, Cecilia, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Scholarly Articles 12502063, Harvard University Department of Economics.
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  16. Turnovsky, Stephen J. & Garci­a-Peñalosa, Cecilia, 2008. "Distributional dynamics in a neoclassical growth model: The role of elastic labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1399-1431, May.
  17. Theo S Eicher & Cecilia Garcia Penalosa, . "Inequality and Growth," Discussion Papers in Economics at the University of Washington 0083, Department of Economics at the University of Washington.
  18. Thorvaldur Gylfason & Gylfi Zoega, 2002. "Inequality and Economic Growth: Do Natural Resources Matter?," CESifo Working Paper Series 712, CESifo Group Munich.
  19. Perotti, Roberto, 1996. " Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-87, June.
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  22. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  23. Turnovsky, Stephen J., 2002. "Knife-Edge Conditions And The Macrodynamics Of Small Open Economies," Macroeconomic Dynamics, Cambridge University Press, vol. 6(02), pages 307-335, April.
  24. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
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Cited by:
  1. Chu, Angus C. & Peng, Shin-Kun, 2011. "International intellectual property rights: Effects on growth, welfare and income inequality," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 276-287, June.
  2. G. C. Lim & Paul D. McNelis, 2014. "Income Inequality, Trade and Financial Openness," Melbourne Institute Working Paper Series wp2014n07, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.

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