Inequality-Driven Growth: Unveiling Aggregation Effects in Growth Equations
AbstractIt 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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Bibliographic InfoPaper provided by EconWPA in its series Development and Comp Systems with number 0511028.
Length: 22 pages
Date of creation: 26 Nov 2005
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Inequality; Growth; Income Distribution; Aggregation; Heterogeneity; AK Model; Brazil; China;
Other versions of this item:
- Pedro H. Albuquerque, 2004. "Inequality-Driven Growth: Unveiling Aggregation Effects in Growth Equations," Econometric Society 2004 Latin American Meetings 7, Econometric Society.
- Pedro H. Albuquerque, 2004. "Inequality-Driven Growth: Unveiling Aggregation Effects in Growth Equations," Econometric Society 2004 Far Eastern Meetings 769, Econometric Society.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-09 (All new papers)
- NEP-CNA-2005-12-09 (China)
- NEP-DEV-2005-12-09 (Development)
- NEP-SEA-2005-12-09 (South East Asia)
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