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Does inequality benefit growth? New evidence using a panel VAR approach

Author

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  • Marcelo Eduardo Alves da Silva

Abstract

Purpose - This paper aims to investigate the dynamic relationship between economic growth and income inequality, an issue that has not found a clear consensus in the literature. Design/methodology/approach - The paper uses a Panel VAR approach, using state-level data for Brazil, to assess the dynamic effects of inequality on economic growth and vice versa. Findings - The paper shows that inequality shocks lead to higher economic growth, therefore supporting the view that, in poor countries, higher inequality does benefit economic growth. The paper also presents evidence that higher growth leads to lower income inequality. The results are robust to different inequality measures and when a measure of human capital accumulation is included in the estimation. Originality/value - Recent evidence has favored the idea that higher inequality hurts economic growth. This paper shows that this might not be the case when the dynamic relationship between growth and inequality is examined in a developing country with high inequality and capital market imperfections.

Suggested Citation

  • Marcelo Eduardo Alves da Silva, 2020. "Does inequality benefit growth? New evidence using a panel VAR approach," International Journal of Development Issues, Emerald Group Publishing Limited, vol. 19(1), pages 63-76, January.
    • Handle: RePEc:eme:ijdipp:ijdi-05-2019-0088
    DOI: 10.1108/IJDI-05-2019-0088
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    Citations

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    Cited by:

    1. Mdingi, Kholeka & Ho, Sin-Yu, 2023. "Income inequality and economic growth: An empirical investigation in South Africa," MPRA Paper 117733, University Library of Munich, Germany.
    2. Pedro Cavalcanti Gonçalves Ferreira, 2021. "Market Power and Inequality: a model of the Brazilian economy," Working Papers REM 2021/0201, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.

    More about this item

    Keywords

    Income inequality; Panel VAR; Economic growth; O47; O11; C33;
    All these keywords.

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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