Nonlinearity between Inequality and Growth

Shu Chin Lin, Ho Chuan Huang, Dong-Hyeon Kim, Chih Chuan Yeh

Research output: Contribution to journalArticle

19 Citations (Scopus)

Abstract

The existing literature shows that income inequality plays an important role in growth process, and such a relationship is better characterized as nonlinearity. The paper revisits the issue by employing the threshold regressions with instrumental variables approach. Using the initial level of economic development as a threshold variable, we find strong evidence in support of a nonlinear income threshold in the relationship. In particular, the data show that an increase in inequality would hinder growth in low-income countries but accelerate growth in high-income ones. The results therefore suggest that redistributive policy that alleviates inequality can foster economic growth in low-income countries, while policymakers confront a tradeoff between inequality and growth in high-income countries.

Original languageEnglish
Article number3
JournalStudies in Nonlinear Dynamics and Econometrics
Volume13
Issue number2
Publication statusPublished - 2009 May 12
Externally publishedYes

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Keywords

  • Growth
  • Inequality
  • Instrumental variables
  • Threshold

ASJC Scopus subject areas

  • Economics and Econometrics
  • Social Sciences (miscellaneous)
  • Analysis

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