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Income Inequality and Growth Volatility

  • László Kónya

    ()

    (School of Economics, La Trobe University)

  • Chris Mouratidis

    (Victorian Department of Treasury and Finance)

The aim of this paper is to study the potentially simultaneous relationship between income inequality and growth volatility for seventy countries between 1960 and 2002. We start with the revision of the relevant literature, with special regards to the papers that most strongly motivated our research, Iyigun and Owen (2004) and Breen and Garcia-Pealosa (2004). Then, we perform two types of analysis; a cross-sectional analysis based on country averages of all available annual observations, and a panel-data analysis with fixed effects based on 6 - year averages. The cross-sectional and panel estimation results are markedly different. In the first case, there seems to be a mutual relationship between inequality and volatility across countries, but several significant coefficients have illogical signs. In the second case, there is no evidence of simultaneity within a country; inequality seems to be influenced by volatility, but inequality does not have a direct effect on volatility. Given the limitations of the cross- sectional analysis, we believe that the simultaneous relationship found in the cross-sectional model is rather spurious than real.

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File URL: http://www.latrobe.edu.au/__data/assets/pdf_file/0005/130892/2005.01.pdf
File Function: First version, 2005.01.pdf
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Paper provided by School of Economics, La Trobe University in its series Working Papers with number 2005.01.

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Length: 26 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:trb:wpaper:2005.01
Contact details of provider: Web page: http://www.latrobe.edu.au/economics

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  1. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  2. Alesina, Alberto & Perotti, Roberto, 1996. "Income distribution, political instability, and investment," European Economic Review, Elsevier, vol. 40(6), pages 1203-1228, June.
  3. Alberto Alesina & Dani Rodrik, 1991. "Distributive Politics and Economic Growth," NBER Working Papers 3668, National Bureau of Economic Research, Inc.
  4. Philippe Aghion & Abhijit Banerjee & Thomas Piketty, 1999. "Dualism And Macroeconomic Volatility," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1359-1397, November.
  5. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
  6. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank.
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  8. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  9. Caroli, Eve & Garcia-Penalosa, Cecilia, 2002. "Risk aversion and rising wage inequality," Economics Letters, Elsevier, vol. 77(1), pages 21-26, September.
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  12. Garcia-Penalosa, Cecilia & Turnovsky, Stephen J., 2005. "Production risk and the functional distribution of income in a developing economy: tradeoffs and policy responses," Journal of Development Economics, Elsevier, vol. 76(1), pages 175-208, February.
  13. Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
  14. Barro, Robert J & Lee, Jong-Wha, 2001. "International Data on Educational Attainment: Updates and Implications," Oxford Economic Papers, Oxford University Press, vol. 53(3), pages 541-63, July.
  15. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  16. Checchi, Daniele & Garcia-Penalosa, Cecilia, 2004. "Risk and the distribution of human capital," Economics Letters, Elsevier, vol. 82(1), pages 53-61, January.
  17. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
  18. 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.
  19. Durlauf, Steven N., 1994. "Spillovers, stratification, and inequality," European Economic Review, Elsevier, vol. 38(3-4), pages 836-845, April.
  20. Banerjee, Abhijit V & Duflo, Esther, 2003. " Inequality and Growth: What Can the Data Say?," Journal of Economic Growth, Springer, vol. 8(3), pages 267-99, September.
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