DP8033 Inequality and Growth: The Neglected Time Dimension
|Author(s):||David Halter, Manuel Oechslin|
|Publication Date:||September 2010|
|Keyword(s):||Growth, Inequality, Long-run Effects, Medium-run Effects|
|JEL(s):||C23, O11, O15, O43|
|Programme Areas:||International Macroeconomics, Labour Economics|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8033|
The empirical literature on the relationship between inequality and growth offers a contradictory assessment: Estimators based on time-series (differences-based) variation indicate a strong positive link while estimators (also) exploiting the cross-sectional (levelbased) variation suggest a negative relationship. Using an expanded dataset, the present paper confirms this conflicting pattern — and reconciles it on the basis of a simple model. We argue that the differences-based methods are prone to reflect the mostly positive shortor medium-run implications of inequality while the level-based estimators also incorporate more negative long-term consequences. Thus, the latter estimates come close to reflecting the adverse overall impact of inequality in the long run.