Abstract
The existing literature shows that income inequality plays an important role in growth process, and such a relationship is better characterized as nonlinearity. The paper revisits the issue by employing the threshold regressions with instrumental variables approach. Using the initial level of economic development as a threshold variable, we find strong evidence in support of a nonlinear income threshold in the relationship. In particular, the data show that an increase in inequality would hinder growth in low-income countries but accelerate growth in high-income ones. The results therefore suggest that redistributive policy that alleviates inequality can foster economic growth in low-income countries, while policymakers confront a tradeoff between inequality and growth in high-income countries.
Original language | English |
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Article number | 3 |
Journal | Studies in Nonlinear Dynamics and Econometrics |
Volume | 13 |
Issue number | 2 |
DOIs | |
Publication status | Published - 2009 May 12 |
Externally published | Yes |
Keywords
- Growth
- Inequality
- Instrumental variables
- Threshold
ASJC Scopus subject areas
- Analysis
- Social Sciences (miscellaneous)
- Economics and Econometrics