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Income Inequality and Economic Growth: A Simple Theoretical Synthesis

  • Been-Lon Chen

    (Institute of Economics, Academia Sinica)

  • Jang-Ting Guo

    (Department of Economics, University of California)

We show that in an AK model of endogenous growth with CRRA specifications for both private and public consumption goods, income inequality exerts theoretically ambiguous effects on the optimal capital tax rate and the economy¡¯s growth rate. In a calibrated version of the model, we find that the parameter space can be clearly divided into regions that exhibit a positive or negative relationship between income inequality and economic growth. Hence, our analysis provides a theoretical synthesis on the relationship between inequality and growth and helps bring together some recent results in the literature.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 6 (2005)
Issue (Month): 2 (November)
Pages: 319-329

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Handle: RePEc:cuf:journl:y:2005:v:6:i:2:p:319-329
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  1. Aghion, Philippe & Caroli, Eve & Garcia-Penalosa, Cecilia, 1999. "Inequality and economic growth: the perspective of the new growth theories," CEPREMAP Working Papers (Couverture Orange) 9908, CEPREMAP.
  2. Ellen R. McGrattan & Richard Rogerson & Randall Wright, 1995. "An equilibrium model of the business cycle with household production and fiscal policy," Staff Report 191, Federal Reserve Bank of Minneapolis.
  3. Chen, Been-Lon, 2003. "An inverted-U relationship between inequality and long-run growth," Economics Letters, Elsevier, vol. 78(2), pages 205-212, February.
  4. Alberto Alesina & Dani Rodrik, 1991. "Distributive Politics and Economic Growth," NBER Working Papers 3668, National Bureau of Economic Research, Inc.
  5. Savvides, A. & Stengos, T., 2000. "Income Inequality and Economic Development: Evidence from the Threshold Regression Model," Working Papers 2000-2, University of Guelph, Department of Economics and Finance.
  6. Banerjee, Abhijit V & Duflo, Esther, 2003. "Inequality and Growth: What Can the Data Say?," Journal of Economic Growth, Springer, vol. 8(3), pages 267-99, September.
  7. Hongyi Li & Heng-fu Zou, 1998. "Income Inequality Is Not Harmful for Growth: Theory and Evidence," CEMA Working Papers 74, China Economics and Management Academy, Central University of Finance and Economics.
  8. 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.
  9. Hongyi Li & Lyn Squire & Tao Zhang & Heng-fu Zou, 1999. "A Data Set on Income Distribution," CEMA Working Papers 575, China Economics and Management Academy, Central University of Finance and Economics.
  10. Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 465-490.
  11. Deininger, Klaus & Squire, Lyn, 1998. "New ways of looking at old issues: inequality and growth," Journal of Development Economics, Elsevier, vol. 57(2), pages 259-287.
  12. Hongyi Li & Danyang Xie & Heng-Fu Zou, 2000. "Dynamics of income distribution," Canadian Journal of Economics, Canadian Economics Association, vol. 33(4), pages 937-961, November.
  13. Klaus Deininger & Lyn Squire, 1996. "A New Data Set Measuring Income Inequality," CEMA Working Papers 512, China Economics and Management Academy, Central University of Finance and Economics.
  14. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  15. Barro, Robert J, 2000. "Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  16. Clarke, George R. G., 1992. "More evidence on income distribution and growth," Policy Research Working Paper Series 1064, The World Bank.
  17. Li, Hongyi & Squire, Lyn & Zou, Heng-fu, 1998. "Explaining International and Intertemporal Variations in Income Inequality," Economic Journal, Royal Economic Society, vol. 108(446), pages 26-43, January.
  18. Cooley, T.F. & Hansen, G.D., 1991. "The Distortions in a Neoclassical Monetary Economy," Papers 91-01, Rochester, Business - General.
  19. repec:dau:papers:123456789/10091 is not listed on IDEAS
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