Inequality and Economic Growth. Vicious or Virtuous Circles?

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Ana Jesús López Menéndez
Universidade de Oviedo
Spain
Frank A. Cowell
London School of Economics and Political Science
United Kingdom
Vol 22 (2013): Economics of inequality, Special
DOI: https://doi.org/10.15304/rge.22.Extra.1386
Submitted: 10-09-2013 Accepted: 10-09-2013
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Abstract

The relationship between income inequality and economic growth has been widely studied, leading to a controversial debate. Regarding the effect of economic growth on inequality, Kuznets’ inverted-U hypothesis (1955) suggests that inequality first rises with growth and then falls after a turning point. This model has been extended by Anand and Kanbur (1993), and its empirical applications have provided a wide variety of results, depending on the statistical information, the indicators and the estimation techniques. With regard to the effects of inequality on growth, on a theoretical basis the relationship could be of any sign and thus the initial works by Lewis (1954) and Kaldor (1956) defend the existence of positive effects while Alesina & Rodrick (1994), Persson & Tabellini (1994), and Deininger & Squire (1998) assume a negative relationship.The diversity of theoretical assumptions and empirical evidence has stimulated the debate without achieving a consensus about the existence of vicious or virtuous circles. In this context the present paper aims to provide new evidence about the growth-inequality relationship, paying attention to the income level in a double sense. First, we introduce a classification of countries according to their income levels, and second we distinguish between inequality relating to low and high incomes.

Keywords:

Economic growth, Inequality, Kuznets curve, Panel models
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