Empirical Economics

, Volume 42, Issue 1, pp 209–233 | Cite as

Estimating the long-run relationship between income inequality and economic development

  • Tuomas MalinenEmail author


There are several theories describing the effect of income inequality on economic growth. These theories usually predict that there exists some optimal, steady-state growth path between inequality and development. This study uses a new measure of income distribution and panel data cointegration methods to test for the existence of such a steady-state equilibrium relation. It is shown that there is a long-run equilibrium relationship between the variables, and that this relationship is negative in developed economies.


EHII2.1 Panel cointegration Developed and developing economies 

JEL Classification

C23 O15 O40 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Atkinson A, Brandolini A (2001) Promise and pitfalls in the use of secondary data-sets: income inequality in OECD countries as a case study. J Econ Lit 39(3): 771–799CrossRefGoogle Scholar
  2. Baltagi B (2008) Econometric analysis of panel data. Wiley, West SussexGoogle Scholar
  3. Banerjee A, Carrion-i-Silvestre J (2006) Cointegration in panel data with breaks and cross-section dependence. European Central Bank working paper series no. 591. Accessed 20 Aug 2010
  4. Banerjee A, Duflo E (2003) Inequality and growth: what can the data say?. J Econ Growth 8(3): 267–299CrossRefGoogle Scholar
  5. Banerjee A, Marcellino M, Osbat C (2004) Some cautions on the use of panel methods for integrated series of panel data. Econ J 7(2): 322–340Google Scholar
  6. Banerjee A, Marcellino M, Osbat C (2005) Testing for PPP: should we use panel methods?. Empir Econ 30(1): 77–91CrossRefGoogle Scholar
  7. Barro R (2000) Inequality and growth in a panel of countries. J Econ Growth 5(1): 5–32CrossRefGoogle Scholar
  8. Bénabou R (2005) Inequality, technology, and the social contract. In: Aghion P, Durlauf S (eds) Handbook of economic growth 1B. Elsevier, Amsterdam, pp 1595–1638CrossRefGoogle Scholar
  9. Benhabib J, Rustichini A (1996) Social conflict and growth. J Econ Growth 1(1): 125–142CrossRefGoogle Scholar
  10. Breitung J (2005) A parametric approach to estimation of cointegrating vectors in panel data. Econ Rev 24(2): 151–173CrossRefGoogle Scholar
  11. Breitung J, Pesaran H (2008) Unit root and cointegration in panels. In: Matysas L, Sevestre P (eds) The econometrics of panel data: fundamentals and recent developments in theory and practice. Springer, Berlin, pp 279–322Google Scholar
  12. Chen B-L (2003) An inverted-U relationship between inequality and long-run growth. Econ Let 78(2): 205–212CrossRefGoogle Scholar
  13. Deininger K, Squire L (1996) A new data set measuring income inequality. World Bank Econ Rev 10(3): 565–591Google Scholar
  14. Dynan Karen, Skinner J, Zeldes S (2004) Do rich save more. J Pol Econ 112(2): 397–444CrossRefGoogle Scholar
  15. Forbes K (2000) A reassessment of the relationship between inequality and growth. Am Econ Rev 90(4): 869–887CrossRefGoogle Scholar
  16. Föster M, Pearson M (2003) Income distribution and poverty in the OECD area: data and explanations. CESifo Econ Stud 49(4): 479–513CrossRefGoogle Scholar
  17. Frazer G (2006) Inequality and development across and within countries. World Dev 34(9): 1459–1481CrossRefGoogle Scholar
  18. Galbraith J, Kum H (2006) Estimating the inequality of household incomes: a statistical approach to the creation of a dense and consistent global data set. UTIP working paper no. 22. Accessed 10 Jan 2007
  19. Galor O, Moav O (2004) From Physical to human capital accumulation: inequality and the process of development. Rev Econ Stud 71(4): 1001–1026CrossRefGoogle Scholar
  20. Galor O, Zeira J (1993) Income distribution and macroeconomics. Rev Econ Stud 60(1): 35–52CrossRefGoogle Scholar
  21. Heston A, Summer R, Aten B (2006) Penn world table version 6.2. Center for international comparisons of production, income and prices. University of Pennsylvania, PhiladelphiaGoogle Scholar
  22. Hineline D (2008) Parameter heterogeneity in growth regressions. Econ Lett 101(2): 126–129CrossRefGoogle Scholar
  23. Im K, Pesaran H, Shin Y (2003) Testing for unit roots in heteregenous panels. J Econ 115(1): 53–74Google Scholar
  24. Kaldor N (1957) A model of economic growth. Econ J 67(268): 591–624CrossRefGoogle Scholar
  25. Kao C, Chiang MH (2000) On the estimation and inference of a cointegrated regression panel data. In: Baltagi B (eds) Advances in econometrics 15. Emerald, Bingley, pp 179–222Google Scholar
  26. Karlsson S Löthgren M (2000) On the power and interpretation of panel unit root tests. Econ Lett 66(3): 249–255CrossRefGoogle Scholar
  27. Keynes M (1964) The general theory of employment, interest, and money. Harcourt, New YorkGoogle Scholar
  28. Kuznets S (1955) Economic growth and income inequality. Am Econ Rev 45(1): 1–29Google Scholar
  29. Levin A, Lin CF, Chu CS (2002) Unit root tests in panel data: asymptotic and finite-sample properties. J Econ 108(1): 1–24Google Scholar
  30. Li H, Heng-fu Z (1998) Income inequality is not harmful for growth: theory and evidence. Rev Dev Econ 2(3): 318–334CrossRefGoogle Scholar
  31. Lin SC, Huang HC, Weng HW (2006) A semi-parametric partially linear investigation of the Kuznets’ hypothesis. J Comp Econ 34(3): 634–647CrossRefGoogle Scholar
  32. Maddala G, Wu S (1999) A comparative study of unit root tests with panel data and a new simple test. Oxford Bull Econ Stat 61(special issue): 631–652CrossRefGoogle Scholar
  33. Mark N, Ogaki M, Sul D (2005) Dynamic seemingly unrelated cointegrating regressions. Rev Econ Stud 72(3): 797–820CrossRefGoogle Scholar
  34. Mark N, Sul D (2003) Cointegration vector estimation by panel DOLS and long-run money demand. Oxford Bull Econ Stat 65(5): 655–680CrossRefGoogle Scholar
  35. Pedroni P (1999) Critical values for cointegration tests in heterogenous panels with multiple regressors. Oxford Bull Econ Stat 61(special issue): 653–670CrossRefGoogle Scholar
  36. Pedroni P (2000) Fully modified OLS for heterogenous cointegrated panels. In: Baltagi B (eds) Advances in econometrics 15. Emerald, Bingley, pp 93–130Google Scholar
  37. Pedroni P (2004) Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to PPP hypothesis. Econ Theory 20(3): 597–625CrossRefGoogle Scholar
  38. Perotti R (1993) Political equilibrium, income distribution and growth. Rev Econ Stud 60(4): 755–776CrossRefGoogle Scholar
  39. Pesaran H (2007) A simple panel unit root test in the presence of cross section dependence. J Appl Econ 22(2): 265–315CrossRefGoogle Scholar
  40. Phillips P, Moon H (1999) Linear regression limit theory for nonstationary panel data. Econometrica 67(5): 1057–1111CrossRefGoogle Scholar
  41. Phillips Peter, Ouliaris S (1990) Asymptotic properties of residual based tests for cointegration. Econometrica 58(1): 165–193CrossRefGoogle Scholar
  42. Smith A (1776) An inquiry into the nature and causes of wealth of nations. Accessed 6 Sept 2010
  43. Stiglitz J (1969) Distribution of income and wealth among individuals. Econometrica 37(3): 382–397CrossRefGoogle Scholar
  44. Wagner M, Hlouskova J (2010) The performance of panel cointegration methods: results from a large scale simulation study. Econ Rev 29(2): 182–223CrossRefGoogle Scholar

Copyright information

© Springer-Verlag 2010

Authors and Affiliations

  1. 1.Department of Economics and FDPEUniversity of HelsinkiHelsinkiFinland

Personalised recommendations