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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 German Economic Institute

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 German Economic Institute

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The Productivity Effects of Capital Formation in Germany
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 ...

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Jürgen Matthes IW-Policy Paper No. 1 25. February 2022

Stability instead of government overreach

Contrary to what the German government seems to be aiming for, a reform of the Stability and Growth Pact (SGP) is necessary. The debt reduction rule forces highly indebted euro countries to reduce their debt too quickly and too damagingly for growth.

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