Income inequality, financial development, and macroeconomic fluctuations

Murat Iyigun and Ann Owen

Economic Journal, 2004, vol. 114, issue 495, 352-376

Abstract: We examine the relationship between income inequality and variability in aggregate consumption growth. In high-income countries, greater income inequality appears to be associated with more volatility in consumption growth, whereas in lower-income countries, higher levels of income inequality tend to be associated with less volatility. We present evidence that variability in real GDP growth is also related to income inequality in the same way. Our results suggest that the level of financial development may help to explain why the distribution of income affects the short-run variability of consumption and output differently in high-income countries than in low-income countries. Copyright 2004 Royal Economic Society.

Date: 2004
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