Income inequality and economic growth: a panel VAR approach

The paper uses a new and improved comprehensive dataset on inequality to examine the effects of inequality on per capita income and the effects of per capita income on income inequality. The use of such a comprehensive cross-state panel allows for the estimation of the dynamic responses of inequality and per capita income using panel vector autoregressive (VAR) models. Cumulative impulse responses from a baseline bivariate VAR model indicate that shocks to the Gini index of inequality significantly decrease the level of per capita income. This finding is robust to changes in the measures of inequality used, as well as to the estimation of a three-variable model. We also find that the relationship between inequality and per capita income varies over time and is sensitive to particular episodes in history.