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  3. American Economic Review
  4. September 2000
  5. A Reassessment of the Relationship between Inequality and Growth

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

A Reassessment of the Relationship between Inequality and Growth

  • Kristin J. Forbes
American Economic Review
vol. 90, no. 4, September 2000
(pp. 869–887)
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Abstract

This paper challenges the current belief that income inequality has a negative relationship with economic growth. It uses an improved data set on income inequality, which not only reduces measurement error, but also allows estimation via a panel technique. Panel estimation makes it possible to control for time-invariant country-specific effects, therefore eliminating a potential source of omitted-variable bias. Results suggest that in the short and medium term, an increase in a country's level of income inequality has a significant positive relationship with subsequent economic growth. This relationship is highly robust across samples, variable definitions, and model specifications.

Citation

Forbes, Kristin, J. 2000. "A Reassessment of the Relationship between Inequality and Growth." American Economic Review, 90 (4): 869–887. DOI: 10.1257/aer.90.4.869

JEL Classification

  • O15 Economic Development: Human Resources; Human Development; Income Distribution; Migration
  • O47 Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence