Research on inequality and growth can be divided into two strands. One, deriving from Kuznets and Lewis, has tried to identify a mechanistic relationship between growth, or level, of income and inequality. The other has tried to find causal explanations of growth and inequality, treating each independently. In this paper, we draw from both strands to test whether growth and inequality are the joint outcomes of other variables and processes. We find that simultaneous examination of growth and inequality yields significantly different results and has different consequences for policy from previous independent studies.
Beck, Lundberg, and Majnoni extend the recent The authors test these predictions in a pane I data set literature on the link between financial development and covering 63 countries over the period 1960-97, using economic volatility by focusing on the channels through the volatility of terms of trade to proxy for real volatility, which the development of financial intermediaries affects and the volatility of inflation to proxy for motetary economic volatility. Their theoretical model predicts that volatility. They find no robust relationship between the well-developed financial intermediaries dampen the development of financial intermediaries and growth effect of real sector shocks on the volatility of growth volatility, weak evidence that financial intermediaries while magnifying the effect of monetary shocks-dampen the effect of terms of trade volatility, and suggesting that, overall, financial intermediaries have no evidence that financial intermediaries magnify the impact unambiguous effect on growth volatility. of inflation volatility in low-and middle-incom]e countries. This paper-a product of Finance, Development Research Group-is part of a larger effort in the group to un,derstand the links between the financial system and economic growth. Copies of the paper are available free from the World Bank, 18 18
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