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Nonlinearity between Inequality and Growth

Author

Listed:
  • Lin Shu-Chin

    (Tamkang University)

  • Huang Ho-Chuan

    (Tamkang University)

  • Kim Dong-Hyeon

    (Providence University)

  • Yeh Chih-Chuan

    (Overseas Chinese Institute of Technology)

Abstract

The existing literature shows that income inequality plays an important role in growth process, and such a relationship is better characterized as nonlinearity. The paper revisits the issue by employing the threshold regressions with instrumental variables approach. Using the initial level of economic development as a threshold variable, we find strong evidence in support of a nonlinear income threshold in the relationship. In particular, the data show that an increase in inequality would hinder growth in low-income countries but accelerate growth in high-income ones. The results therefore suggest that redistributive policy that alleviates inequality can foster economic growth in low-income countries, while policymakers confront a tradeoff between inequality and growth in high-income countries.

Suggested Citation

  • Lin Shu-Chin & Huang Ho-Chuan & Kim Dong-Hyeon & Yeh Chih-Chuan, 2009. "Nonlinearity between Inequality and Growth," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 13(2), pages 1-20, May.
  • Handle: RePEc:bpj:sndecm:v:13:y:2009:i:2:n:3
    DOI: 10.2202/1558-3708.1635
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    2. Kostenko Elena & Kuznichenko Vladimir M. & Lapshyn Vladimir I., 2013. "Influence of external periodic and non-linear factors upon stability of economic systems," The Problems of Economy, RESEARCH CENTRE FOR INDUSTRIAL DEVELOPMENT PROBLEMS of NAS (KHARKIV, UKRAINE), issue 2, pages 212-219.
    3. Davis, Lewis S., 2018. "Political economy of growth with a taste for status," Journal of Public Economics, Elsevier, vol. 168(C), pages 35-46.
    4. Amarante, Veronica, 2009. "Income Inequality and Economic Growth in Latin America," Economics PhD Theses 0109, Department of Economics, University of Sussex Business School.
    5. Huang, Ho-Chuan (River) & Fang, WenShwo & Miller, Stephen M. & Yeh, Chih-Chuan, 2015. "The effect of growth volatility on income inequality," Economic Modelling, Elsevier, vol. 45(C), pages 212-222.
    6. 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.
    7. Cho , Dooyeon & Kim , Bo Min & Rhee , Dong-Eun, 2014. "Inequality and Growth: Nonlinear Evidence from Heterogeneous Panel Data," Working Papers 14-1, Korea Institute for International Economic Policy.
    8. Arshad Ali Bhatti & M. Emranul Haque & Denise R. Osborn, 2015. "Threshold Effects of Inequality on the Process of Economic Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 205, Economics, The University of Manchester.
    9. Oğuzhan Çepni & Rangan Gupta & Zhihui Lv, 2020. "Threshold effects of inequality on economic growth in the US states: the role of human capital to physical capital ratio," Applied Economics Letters, Taylor & Francis Journals, vol. 27(19), pages 1546-1551, November.
    10. Fernando Delbianco & Carlos Dabús & María angeles Caraballo pou, 2016. "Growth, Inequality and Corruption: Evidence from Developing Countries," Economics Bulletin, AccessEcon, vol. 36(3), pages 1811-1820.
    11. Andreas P. Kyriacou & Leonel Muinelo-Gallo & Oriol Roca-Sagalés, 2015. "Regional inequalities, fiscal decentralization and government quality: empirical evidence from simultaneous equations," Working Papers. Collection A: Public economics, governance and decentralization 1501, Universidade de Vigo, GEN - Governance and Economics research Network.

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