Nonlinearity between Inequality and Growth

Shu-Chin Lin, Ho-Chuan Huang (), Kim Dong-Hyeon () and Yeh Chih-Chuan ()
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Kim Dong-Hyeon: Providence University
Yeh Chih-Chuan: Overseas Chinese Institute of Technology

Studies in Nonlinear Dynamics & Econometrics, 2009, vol. 13, issue 2, 20

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.

Date: 2009
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DOI: 10.2202/1558-3708.1635

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