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Inequality and growth: the neglected time dimension

  • Daniel Halter
  • Manuel Oechslin
  • Josef Zweimüller

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.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 507.

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Date of creation: Nov 2011
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Handle: RePEc:zur:iewwpx:507
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