Pitfalls in Testing for Cointegration between Inequality and the Real Income

Ghislain N. Gueye, Hyeongwoo Kim () and Gilad Sorek

No auwp2016-07, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: Frank (2009) constructed a comprehensive panel of state-level income inequality measures using individual tax filing data from the Internal Revenue Service. Employing an array of cointegration exercises for the data, he reported a positive long-run relationship between income inequality and the real income per capita in the US. This paper questions the validity of his findings. First, we suggest a mis-specification problem in his approach regarding the order of integration in the inequality index, which shows evidence of nonstationarity only for the post-1980 data. Second, we demonstrate that his findings are not reliable because the panel cointegration test he uses requires cross-section independence, which is inappropriate for the US state-level data. Employing panel tests that allow cross-section dependence, we find no evidence of cointegration between inequality and the real income.

Keywords: Inequality; Economic Growth; Cointegration; Cross-Section Dependence; Nonstationarity (search for similar items in EconPapers)
JEL-codes: D31 O40 (search for similar items in EconPapers)
Date: 2016-04
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Related works:
Journal Article: PITFALLS IN TESTING FOR COINTEGRATION BETWEEN INEQUALITY AND THE REAL INCOME (2017)
Working Paper: Pitfalls in Testing for Cointegration between Inequality and the Real Income (2015)
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