Nonlinearity and Cross-Country Dependence of Income Inequality
30 Pages Posted: 19 May 2014
Date Written: May 18, 2014
We use top income data and the newly developed regime switching Gaussian mixture vector autoregressive model to explain the dynamics of income inequality in developed economies during the last 100 years. Our results indicate that the process of income inequality consists of two equilibriums identifiable by high inequality, high variance and low inequality, low variance. Our results also show that income inequality in the US is the driver of changes in income inequality in other developed economies.
Keywords: top 1% income share, GMAR, developed economies
JEL Classification: C32, C33, D30
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