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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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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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Investment, Human Capital and Growth Effects of Public Spending
Martin Beznoska / Björn Kauder / Thomas Obst IW-Policy Paper No. 2 3. February 2021

Investment, Human Capital and Growth Effects of Public Spending

Unlike public sector consumption, public investment is often regarded as contributing to growth. Yet while spending on "intangible" goods such as education does not count as investment, even though it is potentially growth-enhancing, expenditure with little to ...

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Michael Grömling in Intereconomics External Publication 21. January 2021

COVID-19 and the Growth Potential

The lasting economic impact of the coronavirus pandemic will become apparent in the development of the macroeconomic factors of production – labour, capital, human capital as well as the stock of technical knowledge.

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