Business Intelligence

Inequality And Growth: The Neglected Time Dimension

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Executive Summary

The empirical literature on the relationship between inequality and growth offers a contradictory assessment: Estimators based on time-series (differences-based) variation indicate a strong positive link while estimators (also) exploiting the cross-sectional (level-based) variation suggest a negative relationship. Using an expanded dataset, the present paper confirms this conflicting pattern - and reconciles it on the basis of a simple model. The authors argue that the differences-based methods are prone to reflect the mostly positive short- or medium-run implications of inequality while the level-based estimators also incorporate more negative long-term consequences. Thus, the latter estimates come close to reflecting the adverse overall impact of inequality in the long run.

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