Inequality and Growth: A Heterogeneous Approach

34 Pages Posted: 7 Mar 2017

See all articles by Francesco Grigoli

Francesco Grigoli

International Monetary Fund (IMF)

Evelio Paredes

Government of the Kingdom of Spain - Ministerio de Hacienda

C. Gabriel Di Bella

International Monetary Fund (IMF)

Date Written: December 2016

Abstract

The combination of stagnant growth and high levels of income inequality renewed the debate about whether a more even distribution of income can spur economic activity. This paper tests for cross-country convergence in income inequality and estimates its impact on economic growth with a heterogeneous panel structural vector autoregression model, which addresses some empirical challenges plaguing the literature. We find that income inequality is converging across countries, and that its impact on economic growth is heterogeneous. In particular, while the median response of real per capita GDP growth to shocks in income inequality is negative and significant, the dispersion around the estimates is large, with at least one fourth of the countries in the sample presenting a positive effect. The results suggest that the negative effect is mainly driven by the Middle East and Central Asia and the Western Hemisphere across regions, and emerging markets across income levels. Finally, we find evidence that improved institutional frameworks can reduce the negative effect of income inequality on growth.

Keywords: Income inequality, Income distribution, Economic growth, Panel analysis, Structural vector autoregression, Econometric models, Heterogeneity, Gini, income distribution, income inequality, income levels, growth, regions.

JEL Classification: E10, O15, O40

Suggested Citation

Grigoli, Francesco and Paredes, Evelio and Di Bella, C. Gabriel, Inequality and Growth: A Heterogeneous Approach (December 2016). IMF Working Paper No. 16/244. Available at SSRN: https://ssrn.com/abstract=2924349

Francesco Grigoli (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Evelio Paredes

Government of the Kingdom of Spain - Ministerio de Hacienda ( email )

Spain

C. Gabriel Di Bella

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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