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Assesment of the relationship between Inequality and Economic Growth: A panel Data Approach

  • Araceli Ortega Diaz
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    The relationship between income distribution and economic growth has been found to depend on several factors such as capital markets imperfections, moral hazard, indivisibility in investments, and existence of dual economic characteristics. In recent literature the importance of geography has been emphasized in defining this relationship due to it’s relevance to trade and openness. The current work assesses how income inequality influences growth stimating a reduced form growth equation. Using dynamic panel data analysis for the 32 States of Mexico with both, urban personal income for grouped data and household income from national surveys, it is found that inequality and growth are positively related. When analysing different periods, two different relationships emerge: 1) a negative influence of inequality on growth in a period of low trade policies, and a positive influence in a period more open trade, when urban personal income is considered, and 2) the relationship is reversed when monetary household income is used. To complete the research, we also estimated a structural form equation taking into account the fiscal effects of inequality on growth, finding that the relationship is positive but requires improvement of the explanatory variables involved

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    File URL: http://repec.org/esLATM04/up.20859.1082067057.pdf
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    Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 261.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:ecm:latm04:261
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    1. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
    2. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    5. Roland Benabou, 1996. "Inequality and Growth," NBER Working Papers 5658, National Bureau of Economic Research, Inc.
    6. Dilip Mookherjee & Debraj Ray, 2000. "Persistent Inequality," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-108, Boston University - Department of Economics, revised Oct 2002.
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    8. Quah, Danny, 1997. "Empirics for Growth and Distribution: Stratification, Polarization, and Convergence Clubs," CEPR Discussion Papers 1586, C.E.P.R. Discussion Papers.
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    10. 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.
    11. Hammond, Peter J & Rodriguez-Clare, Andres, 1993. " On Endogenizing Long-Run Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 391-425, December.
    12. Perotti, Roberto, 1996. " Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-87, June.
    13. Panizza, Ugo, 2002. " Income Inequality and Economic Growth: Evidence from American Data," Journal of Economic Growth, Springer, vol. 7(1), pages 25-41, March.
    14. Aghion, Philippe & Bolton, Patrick, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 151-72, April.
    15. Barro, Robert J & Lee, Jong Wha, 1996. "International Measures of Schooling Years and Schooling Quality," American Economic Review, American Economic Association, vol. 86(2), pages 218-23, May.
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