How large is the effect of inequality on economic growth?

Sanghamitra Bandyopadhyay () and Rui Sun ()
Additional contact information
Sanghamitra Bandyopadhyay: Queen Mary University of London
Rui Sun: London School of Economics

Economics Bulletin, 2021, vol. 41, issue 2, 523-531

Abstract: Economists and social scientists have long been interested in understanding the relationship between income inequality and economic growth. While the current empirical literature is inconclusive on the nature of their relationship, we also crucially do not know much about how large the effects of inequality and growth shocks are on each other. In this paper, we use a Bayesian structural vector autoregression approach to estimate the relationship between inequality and GDP growth for two comparable countries, the UK and the USA. We find that that the size of the effects of an inequality shock on growth, and vice versa, are very small, accounting for under 2% of the variance. We also find that the effects of the shocks dissipate within ten years, suggesting that the effects of these shocks are a short-term phenomenon. Inasmuch as the size of the effects of an inequality shock on growth, and a growth shock on inequality are so small, researchers should focus on uncovering macroeconomic mechanisms that govern the inequality-and-growth relationship using multi-equation models.

Keywords: inequality; growth; vector autoregressions; Bayesian approach. (search for similar items in EconPapers)
JEL-codes: C3 O1 (search for similar items in EconPapers)
Date: 2021-04-09
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.accessecon.com/Pubs/EB/2021/Volume41/EB-21-V41-I2-P46.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ebl:ecbull:eb-20-01068

Access Statistics for this article

More articles in Economics Bulletin from AccessEcon
Bibliographic data for series maintained by John P. Conley ().