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Pitfalls in Testing for Cointegration between Inequality and the Real Income

Listed author(s):
  • Ghislain N. Gueye
  • Hyeongwoo Kim
  • Gilad Sorek

Frank (2009) constructed a comprehensive panel of state-level income inequality measures using individual tax filing data from the Internal Revenue Service. Employing an array of cointegration exercises for the data, he reported a positive long-run relationship between income inequality and the real income per capita in the US. This paper questions the validity of his findings. First, we suggest a misspecification problem in his approach regarding the order of integration in the inequality index, which shows evidence of nonstationarity only for the post-1980 data. Second, we demonstrate that his findings are not reliable because his panel cointegration tests require cross-section independence, which is inappropriate for the US state-level data. Employing panel tests that allow cross-section dependence, we find no evidence of cointegration between inequality and the real income.

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File URL: http://cla.auburn.edu/econwp/Archives/2015/2015-15.pdf
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Paper provided by Department of Economics, Auburn University in its series Auburn Economics Working Paper Series with number auwp2015-15.

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Date of creation: Oct 2015
Handle: RePEc:abn:wpaper:auwp2015-15
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  14. Panizza, Ugo, 2002. "Income Inequality and Economic Growth: Evidence from American Data," Journal of Economic Growth, Springer, vol. 7(1), pages 25-41, March.
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  17. Taylor, Mark P. & Sarno, Lucio, 1998. "The behavior of real exchange rates during the post-Bretton Woods period," Journal of International Economics, Elsevier, vol. 46(2), pages 281-312, December.
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