A Bayesian Approach to Inequality-Growth Relationship

Abstract

Abstract For almost sixty years, economists debated and continues to debate on how income disparity affects economic growth making this an active area of research. The existing literature in inequality and growth relationship highlights that income inequality may be either positively or negatively associated to economic growth. In addition, several studies have also yielded inconclusive findings. In this study, using relevant inequality data for 56 countries for the time period 1999-2020 we explore the role of inequality on growth. First, we document important stylized facts between inequality and growth and then employ Bayesian Moving Average (BMA) method to investigate whether inequality matters in presence of all growth determinants. Our results indicate inequality does matter in the process of growth. Specifically, we find that inequality has an adverse impact on growth. The posterior inclusion probability of inequality equal to one across all models reaffirms the negative impact of inequality on growth. According to our estimation, one basis point increase in inequality has the potential to reduce growth by nearly four basis points. Our results withstand the robustness checks and also remain unchanged when we use an alternative dependent variable.