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.

Recommended Citation

Shu-Chin Lin, Ho-Chuan Huang, Dong-Hyeon Kim, and Chih-Chuan Yeh (2009) "Nonlinearity between Inequality and Growth", Studies in Nonlinear Dynamics & Econometrics: Vol. 13: No. 2, Article 3.
http://www.bepress.com/snde/vol13/iss2/art3

Related Files

lin_datacode.zip (79 kB)
data and code as well as an explanatory file.