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Inequality and growth: the neglected time dimension

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  • Daniel Halter
  • Manuel Oechslin
  • Josef Zweimüller

Abstract

The empirical literature on the relationship between inequality and growth offers a contradictory assessment: Estimators based on time-series variation indicate a positive link while estimators (also) exploiting the cross-sectional variation suggest a negative relationship. The present paper (i) confirms this conflicting pattern in an expanded dataset; (ii) proposes a simple theoretical framework to highlight the biases associated with the different techniques. We argue that mechanisms generating a positive inequality-growth relationship work mainly in the short-run and are reflected in difference-based estimators. In contrast, mechanisms generating a negative relationship work over the longer term and are reflected in level-based estimators.

Suggested Citation

  • Daniel Halter & Manuel Oechslin & Josef Zweimüller, 2011. "Inequality and growth: the neglected time dimension," IEW - Working Papers 507, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:507
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    References listed on IDEAS

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    More about this item

    Keywords

    Inequality; growth; short-run effects; long-run effects;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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