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Inequality-Driven Growth: Unveiling Aggregation Effects in Growth Equations

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Pedro H. Albuquerque (Texas A&M International University)

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Abstract

It is well known from nonlinear aggregation theory that distributions play a central role in the determination of aggregate relations. This paper establishes a bridge between the aggregation and the inequality and growth literature by applying a log-linear aggregation method to a simple heterogeneous AK growth model. The aggregation effect is explicitly captured in the growth equation by the changes of the mean logarithmic deviation (MLD or Theil’s second measure) of the income, implying that increases in income inequality may be unambiguously associated with temporary increases in a country’s growth rate, in agreement with the empirical findings of Forbes (AER, 2000). Consequently, empirical studies of the long-run effects of income inequality may suffer from aggregation bias if the temporary effects of the MLD changes are not considered. The accelerated growth episodes observed in Brazil and China demonstrate that the increase in income inequality may have resulted in substantial temporary increases in the aggregate growth rates experienced by those countries.

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Publisher Info
Paper provided by EconWPA in its series Development and Comp Systems with number 0511028.

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Length: 22 pages
Date of creation: 26 Nov 2005
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Handle: RePEc:wpa:wuwpdc:0511028

Note: Type of Document - pdf; pages: 22
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Web page: http://129.3.20.41

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Related research
Keywords: Inequality; Growth; Income Distribution; Aggregation; Heterogeneity; AK Model; Brazil; China;

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Find related papers by JEL classification:
O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
O50 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - General

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  1. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March. [Downloadable!] (restricted)
  2. Fishlow, Albert, 1980. "Who Benefits from Economic Development? Comment," American Economic Review, American Economic Association, vol. 70(1), pages 250-56, March.
  3. 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. [Downloadable!] (restricted)
  4. Ravallion, Martin, 1998. "Does aggregation hide the harmful effects of inequality on growth?," Economics Letters, Elsevier, vol. 61(1), pages 73-77, October. [Downloadable!] (restricted)
  5. Bourguignon, Francois, 1979. "Decomposable Income Inequality Measures," Econometrica, Econometric Society, vol. 47(4), pages 901-20, July. [Downloadable!] (restricted)
  6. Pedro H. Albuquerque, 2003. "A practical log-linear aggregation method with examples: heterogeneous income growth in the USA," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(6), pages 665-678. [Downloadable!]
  7. Xin Meng, 2004. "Economic Restructuring and Income Inequality in Urban China," Review of Income and Wealth, Blackwell Publishing, vol. 50(3), pages 357-379, 09. [Downloadable!] (restricted)
  8. Lewbel, Arthur, 1992. "Aggregation with Log-Linear Models," Review of Economic Studies, Blackwell Publishing, vol. 59(3), pages 635-42, July. [Downloadable!] (restricted)
  9. Fishlow, Albert, 1972. "Brazilian Size Distribution of Income," American Economic Review, American Economic Association, vol. 62(2), pages 391-402, May. [Downloadable!] (restricted)
  10. Jones, Larry E. & Manuelli, Rodolfo E., 1997. "The sources of growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 75-114, January. [Downloadable!] (restricted)
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  11. Fields, Gary S, 1980. "Who Benefits from Economic Development? Reply," American Economic Review, American Economic Association, vol. 70(1), pages 257-62, March. [Downloadable!] (restricted)
  12. Xu, Lixin Colin & Zou, Heng-fu, 2000. "Explaining the changes of income distribution in China," China Economic Review, Elsevier, vol. 11(2), pages 149-170, December. [Downloadable!] (restricted)
  13. Gibson, John & Huang, Jikun & Rozelle, Scott, 2001. "Why is income inequality so low in China compared to other countries?: The effect of household survey methods," Economics Letters, Elsevier, vol. 71(3), pages 329-333, June. [Downloadable!] (restricted)
  14. Hirschman, Albert O & Rothschild, Michael, 1973. "The Changing Tolerance for Income Inequality in the Course of Economic Development; with a Mathematical Appendix," The Quarterly Journal of Economics, MIT Press, vol. 87(4), pages 544-66, November. [Downloadable!] (restricted)
  15. Stoker, Thomas M, 1986. "Simple Tests of Distributional Effects on Macroeconomic Equations," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 763-95, August. [Downloadable!] (restricted)
  16. van Garderen, Kees Jan & Lee, Kevin & Pesaran, M. Hashem, 2000. "Cross-sectional aggregation of non-linear models," Journal of Econometrics, Elsevier, vol. 95(2), pages 285-331, April. [Downloadable!] (restricted)
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