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Regional heterogeneity in the relationship between inequality and growth: Evidence from panel vector autoregressions

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  • Atems, Bebonchu

Abstract

This note estimates the responses of income inequality to growth shocks, and growth to shocks to income inequality using a panel VAR model. Employing annual data from 1930 to 2012 for the 50 U.S. states and DC, we find that inequality and growth decrease following respective shocks to growth and inequality. However, we document significant heterogeneity in U.S. regional responses to inequality and growth shocks. Furthermore, variance decompositions show that regional income inequality explains a relatively small proportion of the variation in regional real per capita growth in the short run, but that the explanatory power of inequality for growth rises over time, explaining as much as 60% of the long run unpredictable fluctuations in growth in some regions. We also report substantial heterogeneity in the explanatory power of growth to movements in regional income inequality, with income growth explaining a little over 1% of the long run variation in income inequality in the Mid Atlantic region, but over 45% in the West North Central region.

Suggested Citation

  • Atems, Bebonchu, 2018. "Regional heterogeneity in the relationship between inequality and growth: Evidence from panel vector autoregressions," The Journal of Economic Asymmetries, Elsevier, vol. 17(C), pages 41-47.
    • Handle: RePEc:eee:joecas:v:17:y:2018:i:c:p:41-47
    DOI: 10.1016/j.jeca.2018.03.001
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    References listed on IDEAS

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    1. Mark D. Partridge, 2005. "Does Income Distribution Affect U.S. State Economic Growth?," Journal of Regional Science, Wiley Blackwell, vol. 45(2), pages 363-394, May.
    2. Atems, Bebonchu, 2013. "The spatial dynamics of growth and inequality: Evidence using U.S. county-level data," Economics Letters, Elsevier, vol. 118(1), pages 19-22.
    3. Bebonchu Atems, 2013. "A Note On The Differential Regional Effects Of Income Inequality: Empirical Evidence Using U.S. County-Level Data," Journal of Regional Science, Wiley Blackwell, vol. 53(4), pages 656-671, October.
    4. Bebonchu Atems & Jason Jones, 2015. "Income inequality and economic growth: a panel VAR approach," Empirical Economics, Springer, vol. 48(4), pages 1541-1561, June.
    5. Belal Fallah & Mark Partridge, 2007. "The elusive inequality-economic growth relationship: are there differences between cities and the countryside?," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 41(2), pages 375-400, June.
    6. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    7. William Levernier & Dan S. Rickman & Mark D. Partridge, 1995. "Variation in U.S. State Income Inequality: 1960-1990," International Regional Science Review, , vol. 18(3), pages 355-378, July.
    8. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 190-210, May.
    9. Mark W. Frank, 2009. "Inequality And Growth In The United States: Evidence From A New State‐Level Panel Of Income Inequality Measures," Economic Inquiry, Western Economic Association International, vol. 47(1), pages 55-68, January.
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    Cited by:

    1. Bebonchu Atems, 2020. "Identifying the Dynamic Effects of Income Inequality on Crime," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(4), pages 751-782, August.
    2. Atems, Bebonchu, 2019. "The effects of government spending shocks: Evidence from U.S. states," Regional Science and Urban Economics, Elsevier, vol. 74(C), pages 65-80.

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    More about this item

    Keywords

    Inequality; Growth; Panel vector autoregressions;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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