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Inequality-growth nexus along the development process

Author

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  • Lin Yi-Chen

    (Department of Economics, Tamkang University, 151 Yingzhuan Rd., Tamshui District, New Taipei City 25137, Taiwan)

  • Huang Ho-Chuan (River)

    (Department of Banking and Finance, Tamkang University, Tamshui, Taiwan)

  • Yeh Chih-Chuan

    (Department of Finance, Overseas Chinese University, Taichung, Taiwan)

Abstract

The paper examines whether the effect of inequality on growth varies with the level of economic development. Using a comprehensive panel of annual data for the 48 contiguous US states over the period 1945–2004, we find overwhelming evidence in support of threshold effects in the relationship between inequality and growth. Our analysis shows that while the effect of inequality on growth is significantly negative at lower levels of development, this effect diminishes along the growth process and then turns significantly positive at higher levels of development. Quantitatively, the coefficient estimates imply that when real income per capita is below the threshold of $12,140 (2004 US dollar), a one standard deviation increase in the share of income held by the top 1% of the population reduces the growth rate of real per capita income by 0.6479 percentage points. In contrast, when income per capita is above the threshold of $21,065 (2004 US dollar), a one standard deviation increase in the top percentile income share raises the rate of growth of real per capita income by 0.2561 percentage points.

Suggested Citation

  • Lin Yi-Chen & Huang Ho-Chuan (River) & Yeh Chih-Chuan, 2014. "Inequality-growth nexus along the development process," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(3), pages 1-16, May.
    • Handle: RePEc:bpj:sndecm:v:18:y:2014:i:3:p:16:n:3
    DOI: 10.1515/snde-2012-0037
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    2. Muhammad Hidayat & Ranti Darwin & M. Fikry Hadi, 2020. "Does Energy Infrastructure Reduce Inequality Inter-regional in Riau Province, Indonesia?," International Journal of Energy Economics and Policy, Econjournals, vol. 10(1), pages 160-164.
    3. Chen, Shu-Hua, 2020. "Inequality-growth nexus under progressive income taxation," Journal of Macroeconomics, Elsevier, vol. 65(C).
    4. Wang, Shengquan, 2023. "Income inequality and systemic banking crises: A nonlinear nexus," Economic Systems, Elsevier, vol. 47(4).

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