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Nonlinearity between Inequality and Growth

  • Lin Shu-Chin

    ()

    (Tamkang University)

  • Huang Ho-Chuan

    ()

    (Tamkang University)

  • Kim Dong-Hyeon

    ()

    (Providence University)

  • Yeh Chih-Chuan

    ()

    (Overseas Chinese Institute of Technology)

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.

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Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 13 (2009)
Issue (Month): 2 (May)
Pages: 1-20

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Handle: RePEc:bpj:sndecm:v:13:y:2009:i:2:n:3
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