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Inequality, Finance, and Growth

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  • Matías Braun
  • Francisco Parro
  • Patricio Valenzuela

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Abstract

This paper investigates the relationship between income inequality, financial development and economic growth from both a theoretical and an empirical perspective. This paper introduces a simple model in which the effect of inequality on growth depends on the degree of development of the domestic financial market. The model predicts that greater inequality reduces growth in economies with low levels of financial development but that this effect is attenuated in economies with more developed systems. Using a panel dataset that covers a large number of countries over the past four decades, this paper shows empirical evidence that is consistent with the main prediction of the model. The model also predicts that individuals in economies with developed financial markets have a higher tolerance to inequality; we also provide evidence for this through value surveys. Overall, this paper's major findings highlight that some of the pernicious effects of inequality can be attenuated by improving access to credit. JEL Classification: D3; E6; P1; O4; I2. Key words: Keywords: Financial development; growth; inequality; income distribution; private credit.

Suggested Citation

  • Matías Braun & Francisco Parro & Patricio Valenzuela, 2017. "Inequality, Finance, and Growth," Documentos de Trabajo 329, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:329
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    File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120170313104842.pdf
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    References listed on IDEAS

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    1. Daniel Halter & Manuel Oechslin & Josef Zweimüller, 2014. "Inequality and growth: the neglected time dimension," Journal of Economic Growth, Springer, vol. 19(1), pages 81-104, March.
    2. Rémi Bazillier & Jérôme Hericourt, 2017. "The Circular Relationship Between Inequality, Leverage, And Financial Crises," Journal of Economic Surveys, Wiley Blackwell, vol. 31(2), pages 463-496, April.
    3. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-298, April.
    4. Panizza, Ugo, 2002. "Income Inequality and Economic Growth: Evidence from American Data," Journal of Economic Growth, Springer, vol. 7(1), pages 25-41, March.
    5. Andrew Leigh, 2007. "How Closely Do Top Income Shares Track Other Measures of Inequality?," Economic Journal, Royal Economic Society, vol. 117(524), pages 619-633, November.
    6. Halter, David & Oechslin, Manuel, 2010. "Inequality and Growth: The Neglected Time Dimension," CEPR Discussion Papers 8033, C.E.P.R. Discussion Papers.
    7. Li, Hongyi & Zou, Heng-fu, 1998. "Income Inequality Is Not Harmful for Growth: Theory and Evidence," Review of Development Economics, Wiley Blackwell, vol. 2(3), pages 318-334, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • P1 - Economic Systems - - Capitalist Systems
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • I2 - Health, Education, and Welfare - - Education

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