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Inequality-Driven Growth: Unveiling Aggregation Effects in Growth Equations

  • Pedro H. Albuquerque

    (Texas A&M International University)

It is well known from nonlinear aggregation theory that distributions play a central role in the determination of aggregate relations. This paper establishes a bridge between the aggregation and the inequality and growth literature by applying a log-linear aggregation method to a simple heterogeneous AK growth model. The aggregation effect is explicitly captured in the growth equation by the changes of the mean logarithmic deviation (MLD or Theil’s second measure) of the income, implying that increases in income inequality may be unambiguously associated with temporary increases in a country’s growth rate, in agreement with the empirical findings of Forbes (AER, 2000). Consequently, empirical studies of the long-run effects of income inequality may suffer from aggregation bias if the temporary effects of the MLD changes are not considered. The accelerated growth episodes observed in Brazil and China demonstrate that the increase in income inequality may have resulted in substantial temporary increases in the aggregate growth rates experienced by those countries.

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File URL: http://econwpa.repec.org/eps/dev/papers/0511/0511028.pdf
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Paper provided by EconWPA in its series Development and Comp Systems with number 0511028.

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Length: 22 pages
Date of creation: 26 Nov 2005
Date of revision:
Handle: RePEc:wpa:wuwpdc:0511028
Note: Type of Document - pdf; pages: 22
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Ravallion, Martin, 1998. "Does aggregation hide the harmful effects of inequality on growth?," Economics Letters, Elsevier, vol. 61(1), pages 73-77, October.
  2. 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.
  3. Hirschman, Albert O & Rothschild, Michael, 1973. "The Changing Tolerance for Income Inequality in the Course of Economic Development; with a Mathematical Appendix," The Quarterly Journal of Economics, MIT Press, vol. 87(4), pages 544-66, November.
  4. Fishlow, Albert, 1980. "Who Benefits from Economic Development? Comment," American Economic Review, American Economic Association, vol. 70(1), pages 250-56, March.
  5. Bourguignon, Francois, 1979. "Decomposable Income Inequality Measures," Econometrica, Econometric Society, vol. 47(4), pages 901-20, July.
  6. Stoker, Thomas M, 1986. "Simple Tests of Distributional Effects on Macroeconomic Equations," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 763-95, August.
  7. Larry E. Jones & Rodolfo E. Manuelli, 1994. "The Sources of Growth," Macroeconomics 9411002, EconWPA, revised 05 Mar 1999.
  8. Lixin Colin Xu & Heng-fu Zou, 2000. "Explaining the Changes of Income Distribution in China," CEMA Working Papers 473, China Economics and Management Academy, Central University of Finance and Economics.
  9. Gibson, John & Huang, Jikun & Rozelle, Scott, 2001. "Why is income inequality so low in China compared to other countries?: The effect of household survey methods," Economics Letters, Elsevier, vol. 71(3), pages 329-333, June.
  10. Van Garderen, K. J. & Lee, K. & Pesaran M., 1998. "Cross-sectional Aggregation of Non-linear Models," Cambridge Working Papers in Economics 9803, Faculty of Economics, University of Cambridge.
  11. Deininger, K & Squire, L, 1996. "Measuring Income Inequality : A New Data-Base," Papers 537, Harvard - Institute for International Development.
  12. Pedro H. Albuquerque, 2003. "A practical log-linear aggregation method with examples: heterogeneous income growth in the USA," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(6), pages 665-678.
  13. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  14. Lewbel, Arthur, 1992. "Aggregation with Log-Linear Models," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 635-42, July.
  15. Fields, Gary S, 1980. "Who Benefits from Economic Development? Reply," American Economic Review, American Economic Association, vol. 70(1), pages 257-62, March.
  16. Fishlow, Albert, 1972. "Brazilian Size Distribution of Income," American Economic Review, American Economic Association, vol. 62(2), pages 391-402, May.
  17. Xin Meng, 2004. "Economic Restructuring and Income Inequality in Urban China," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 50(3), pages 357-379, 09.
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