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Size matters: Measuring the effects of inequality and growth shocks

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  • Bandyopadhyay, Sanghamitra
  • Sun, Rui

Abstract

Understanding the relationship between income inequality and economic growth is of utmost importance to social scientists, but the empirical evidence is inconclusive. We use a Bayesian structural vector autoregression approach to estimate the relationship between inequality and growth for two large economies, China and the USA, from 1978 to 2018. We find that a growth shock is inequality-increasing, and an inequality shock is growth-reducing. However, the size of the effects of these shocks is extremely small, accounting for under 2% of the variance for both countries, suggesting other important socio-economic determinants of growth and inequality.

Suggested Citation

  • Bandyopadhyay, Sanghamitra & Sun, Rui, 2025. "Size matters: Measuring the effects of inequality and growth shocks," China Economic Review, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:chieco:v:93:y:2025:i:c:s1043951x25000872
    DOI: 10.1016/j.chieco.2025.102429
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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