Inequality and Growth: A Heterogeneous Approach

Abstract

This article tests for cross-country convergence in income inequality and estimates its impact on growth with a heterogeneous Panel Structural Vector AutoRegression model, which addresses some empirical challenges plaguing the literature. We find that income inequality is converging across countries, and that its impact on growth is heterogeneous. While the median response of real per capita Gross Domestic Product (GDP) growth to income inequality shocks is negative and significant, at least one fourth of the sample presents a positive effect. Also, we find evidence that improved institutional frameworks can reduce the negative effect of income inequality on growth.