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Inequality and Growth: Uncovering the main conclusions from the empirics

  • Pedro Cunha Neves

    ()

    (Faculdade de Economia, Universidade do Porto, Portugal)

  • Sandra Tavares Silva

    ()

    (CEF.UP, Faculdade de Economia, Universidade do Porto, Portugal)

The theme of the relationship between inequality and economic growth has gained considerable attention among economists over the last two decades. In this paper, we analyse the effect of inequality on growth, whose related literature has been producing inconclusive results. After an exhaustive study of the major empirical works in this specific research area, we are able not only to advance with some potential explanations for the apparent lack of consensus on the empirical assessment of the inequality-growth relationship, but also to achieve a better understanding of the nature of this relationship and the forces underlying it. We conclude that the disparities found in the results of the estimation of the reduced-form relationship are most likely due to three dimensions: differences in the estimation techniques, the countries and the periods included in the sample, and the variable used to measure inequality. The last two aspects have particularly important implications. First, country/region specificities play a crucial role in the relationship between inequality and growth, so more emphasis should be put on the estimation of such a relationship on a national/regional basis, rather than trying to establish universal patterns. Second, the time horizon of the analysis should be carefully chosen, as different transmission channels from inequality to growth tend to operate differently in the short and in the long-run. Third, the fact that inequality in wealth distribution has a stronger negative effect on growth than inequality in income distribution may indicate that the channels through which inequality affects growth are not the same in both distributions. Therefore, we argue that in order to produce an accurate assessment of both the reduced-form relationship and the underlying transmission channels these aspects should be accordingly considered, which has not been the case in most of the empirical literature.

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File URL: http://www.fep.up.pt/investigacao/workingpapers/10.07.23_wp381.pdf
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Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 381.

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Length: 35 pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:por:fepwps:381
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