Inequality, financial development and economic growth in the OECD, 1870–2011

Abstract

Inequality's effect on growth remains elusive, largely due to endogeneity, complex interactions, and lead-lag relationships. We revisit this issue by examining the four main channels through which inequality transmits to growth: savings, investment, education, and knowledge production. We construct new panel data for 21 OECD countries spanning 142 years. External communist influence is used as a new time-varying instrument for inequality and the effects of inequality on the outcome variables are made conditional on the stage of financial development. Our results show that inequality hampers growth at low to moderate levels of financial development but promotes growth at advanced levels.

What Factors Affect Income Inequality and Economic Growth in Middle-Income Countries?

“…In other views, a negative effect of income inequality on economic growth was also stressed in the work of Madsen et al (2018). Specifically, the authors argued that at low levels of financial development, proxied by the credit to the non-banking sector/nominal GDP ratio, income inequality hindered growth.…”

“…The link between income inequality and economic growth and related issues has been extensively investigated in the literature. Typical studies are those by Forbes (2000) and Barro (2000), followed by various other studies (Fawaz et al 2014;Wahiba and Weriemmi 2014;Huang et al 2015;Madsen et al 2018;Nguyen et al 2019;Vo et al 2019). The current study was conducted to provide additional empirical evidence on growth and income inequality for middle-income countries.…”

Does Monetary Policy Affect Income Inequality in the Euro Area?

“…Recent decades have witnessed rising wealth and income inequality in advanced countries (Piketty, 2014;OECD, 2015) with possibly serious repercussions. Greater inequality worsens the efficiency of resource allocation, constrains aggregate demand and output growth, and depresses consumption and investment (Onaran et al, 2011;Berg et al, 2018;Madsen et al, 2018). More uneven income distribution may also lead to higher household indebtedness, fuel asset market bubbles, and increase financial instability (Coibion et al, 2014;Kumhof et al, 2015;Perugini et al, 2016).…”

Inequality Within the EU-15 Countries: Have Social Benefits Been Pro-poor, Pro-middle Class or Pro-rich?

“…Despite the increasingly growing debates regarding the role of social benefits in reducing inequality in Europe, the inequality-growth nexus debate still receives comparatively greater attention in the literature. Expectedly, studies on the inequality-growth nexus do not set out to contribute to the debate on the impact of social benefits on inequality (see, for example, Alesina & Rodrik 1994;Perotti 1996;Barro 2000;Easterly 2000;Ostry et al, 2014;Cingano 2014;Madsen et al, 2018). Hence, there is a very limited extent to which such studies can be relevant to the debate.…”