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What Drives the Cross-Country Growth and Inequality Correlation?

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  • Bandyopadhyay, Debasis
  • Basu, Parantap

Abstract

We present a neo-classical model that explores the determinants of growth-inequality correlation and attempts to reconcile the seemingly conflicting evidence on the nature of growth-inequality relationship. The initial distribution of human capital determines the long run income distribution and the growth rate by influencing the occupational choice of the agents. The steady state proportion of adults that innovates and updates human capital is path-dependent. The output elasticity of skilled-labor, barriers to knowledge spillovers, and the degree of redistribution determine the range of steady state equilibria. From a calibration experiment we report that a combination of a skill-intensive technology, low barriers to knowledge spillovers, and a high degree of redistribution characterize the group of countries with a positive growth-inequality relationship. A negative relationship arises in the group with the opposite characteristics.

Suggested Citation

  • Bandyopadhyay, Debasis & Basu, Parantap, 2002. "What Drives the Cross-Country Growth and Inequality Correlation?," Working Papers 210, Department of Economics, The University of Auckland.
    • Handle: RePEc:auc:wpaper:210
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    Cited by:

    1. 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 237-252, May.
    2. Andergassen, Rainer & Nardini, Franco, 2007. "Educational choice, endogenous inequality and economic development," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 940-958, December.
    3. Basu, Parantap & Getachew, Yoseph, 2015. "An adjustment cost model of social mobility," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 177-190.
    4. Basu, Parantap & Guariglia, Alessandra, 2007. "Foreign Direct Investment, inequality, and growth," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 824-839, December.
    5. Lin Shu-Chin & Huang Ho-Chuan & Kim Dong-Hyeon & Yeh Chih-Chuan, 2009. "Nonlinearity between Inequality and Growth," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 13(2), pages 1-20, May.
    6. Arshad Ali Bhatti & M. Emranul Haque & Denise R. Osborn, 2015. "Threshold Effects of Inequality on the Process of Economic Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 205, Economics, The University of Manchester.
    7. Parantap Basu & Alessandra Guariglia, 2004. "Inequality and Industrialization," CDMA Conference Paper Series 0401, Centre for Dynamic Macroeconomic Analysis.
    8. Wang, Shengquan, 2023. "Income inequality and systemic banking crises: A nonlinear nexus," Economic Systems, Elsevier, vol. 47(4).

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    Keywords

    General Aggregative Models; Economics;

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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