Size matters: Measuring the effects of inequality and growth shocks

Sanghamitra Bandyopadhyay and Rui Sun

China Economic Review, 2025, vol. 93, issue C

Abstract: Understanding the relationship between income inequality and economic growth is of utmost importance to social scientists, but the empirical evidence is inconclusive. We use a Bayesian structural vector autoregression approach to estimate the relationship between inequality and growth for two large economies, China and the USA, from 1978 to 2018. We find that a growth shock is inequality-increasing, and an inequality shock is growth-reducing. However, the size of the effects of these shocks is extremely small, accounting for under 2% of the variance for both countries, suggesting other important socio-economic determinants of growth and inequality.

Keywords: Inequality; Growth; Bayesian-VAR; China; Sign-restriction (search for similar items in EconPapers)
JEL-codes: C32 C33 D31 D63 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:93:y:2025:i:c:s1043951x25000872

DOI: 10.1016/j.chieco.2025.102429

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