Three Essays on Income Inequality and Economic Growth

The dissertation consists of three chapters on the relationship between income inequality and economic growth. The inequality-growth relationship has received much attention from both theoretical and empirical economists. However, their findings have largely been inconclusive. The first paper (Chapter 2) reviews the existing inequality-growth literature by considering bi-directional causality and nonlinearity issues. I first attempt to summarize channels and model specifications for both directions of effect. Reviewing the coefficients that measure the effect of inequality on growth, I show that estimates from cross sectional regressions are consistently negative, while estimates from panel regressions are inconclusive. The main issues in estimating this relationship raised in empirical studies are also discussed in this chapter. What are the relationship between inequality and growth? Is there any difference between the long-run and short-run? The second and third papers (Chapter 3 and Chapter 4) then capture the long-run and short-run relationship between inequality and growth respectively. The second paper uses newly proposed methods that test convergence to investigate the longrun relationship between income inequality and economic growth from a unique perspective. Both the relative convergence and weak-σ convergence approaches demonstrate a divergent result for inequality but a convergent result for income, which represents evidence that there is no long-run relationship between income inequality and economic growth. Common factor analysis is used to help interpret the long-run relationship between income inequality and economic growth. Is there any short-run relationship? The conventional approach to panel regression struggles to capture the short-run dynamics of the relationship between inequality and economic growth. The third paper introduces a more general common factor framework by applying the Common Correlated Effects (CCE) estimator proposed by (Pesaran, 2006) and (Chudik and Pesaran, 2015) so that unobserved common factors with heterogeneous factor loadings can be accounted for. Using a panel VAR framework this paper finds that in the short-run no relationship between inequality and growth can be observed among advanced economies. While the results of this study differ from those of the existing panel analysis literature, they are consistent with the long-run relationship between inequality and growth discussed in the previous chapter. The change in income inequality is attributed to country specific policy rather than economic growth.