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Galina Kolev / Judith Niehues IW-Report No. 7 21. March 2016 The Inequality-Growth Relationship

An Empirical Reassessment

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The Inequality-Growth Relationship
Galina Kolev / Judith Niehues IW-Report No. 7 21. March 2016

The Inequality-Growth Relationship

IW-Report

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German Economic Institute (IW) German Economic Institute (IW)

An Empirical Reassessment

Recently, some influential empirical studies found evidence in favour of a negative relationship between income inequality and economic growth, implying the conclusion that inequality reducing policies will foster economic growth. The studies have in common that they all rely on the System GMM dynamic panel estimator. We argue that this estimator is most likely to suffer from a severe weak instrument problem in the inequality-growth setting because lagged differences of inequality have practically no explanatory power for current inequality levels. Thus, it is biased in the direction of OLS and fails to control for country heterogeneity. Using traditional Fixed Effects models or Difference GMM estimators yields positive coefficients on the inequality variable. Furthermore, we find evidence for a nonlinear relationship between inequality and growth when considering a sample of developed and developing economies. Thus, the effect of net income inequality on growth seems to be negative only for less-developed countries and for countries with high levels of inequality, and non-significant or rather positive otherwise.

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The Inequality-Growth Relationship
Galina Kolev / Judith Niehues IW-Report No. 7 21. March 2016

Galina Kolev / Judith Niehues: The Inequality-Growth Relationship – An Empirical Reassessment

IW-Report

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German Economic Institute (IW) German Economic Institute (IW)

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Melinda Fremerey / Andreas Lichter / Max Löffler in CESifo Working Papers External Publication 20. June 2022

Fiscal and Economic Effects of Local Austerity

We study the consequences of a large-scale austerity program targeting financially-constrained municipalities in Germany. For identification, we exploit the quasi-random assignment of treatment among equally-distressed municipalities using a ...

IW

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Michael Grömling IW-Trends No. 2 9. May 2022

The Productivity Effects of Capital Formation in Germany

Despite broad-based digitalisation, productivity advances in Germany in recent years have been considerably lower than in previous decades. This paper conducts a growth accounting which points to steeply declining stimuli from technical progress and especially ...

IW

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