Interrelation among Economic Growth, Income Inequality, and Fiscal Performance: Evidence from Anglo-saxon Countries

Abstract

The interrelation among economic growth, income inequality, and fiscal performance is very complex. The objective of this paper is to analyze the dynamic interrelations among these variables using structural VAR models and to examine transmission channels among them. The empirical analysis is implemented for the UK, the USA, and Canada, using the longest possible consistently measured comparable data on income inequality. The obtained results show that inequality has a negative effect on growth in the case of the UK while the effect is positive for the USA and Canada. An increase in inequality worsens fiscal performance for all the considered countries.

Przewidywanie tendencji rozwoju społeczno-ekonomicznego w Polsce na podstawie poziomu nierówności dochodowych z zastosowaniem modelu VAR

“…Model ten stosowano dotychczas w analizie związku między nierównościami dochodowymi a wzrostem gospodarczym (m.in. [Davtyan 2014]). Nie przedstawiono jednak jeszcze analiz relacji między nierównościami i rozwojem społeczno-ekonomicznym.…”

“…Wyniki przeprowadzenia opisanego testu zamieszczono w tabeli 1. Szeregi dla wskaźnika rozwoju społeczno-ekonomicznego, współczynnika Giniego i miernika zróżnicowania decylowego generowane są przez proces trendostacjonarnyte zmienne zostały przekształcone w zmienne stacjonarne z wykorzystaniem fi ltru Hodricka i Prescotta [1997], jednego z najczęściej stosowanych narzędzi detrendyzacji [Davtyan 2014]. Szereg dla zmodyfi kowanego wskaźnika zróżni-cowania kwintylowego zawiera pierwiastek jednostkowy (generowany jest przez proces przyrostostacjonarny), zatem poddano go różnicowaniu pierwszego stopnia -szereg przyrostów jest stacjonarny (wartość p w teście ADF: 0,001).…”

Interrelation between Growth and Inequality

“…We can also apply the usual Granger-causality test to the VECM estimates to test for short-run dynamics around the long-run cointegration relationship. Davtyan (2014) used VAR in exploring the interrelationships between growth and inequality for three countries-the UK, the US, and Canada-based on 1960 to 2010 annual data series. He shows that income inequality has a negative effect on economic growth in the UK, but that the effect is positive in the US and Canada.…”

“…He shows that income inequality has a negative effect on economic growth in the UK, but that the effect is positive in the US and Canada. Building on the Davtyan (2014) approach, our basic model comprises two variables for economic growth and inequality. Further, the extended model includes a fiscal variable-as fiscal performance should have an impact on both growth and inequality.…”

“…Cevik and Correa-Caro (2015), using PRC and panel BRIC+ data have found evidence of the Kuznets curve and, for the PRC, government spending and taxation have opposite effects on income inequality. Davtyan (2014) uses structural vector autoregression (VAR) methodology to show that income inequality has a negative effect on economic growth in the case of the United Kingdom (UK), while a positive effect in the United States (US) and Canada. Given that measuring Gini coefficients might mask actual income distribution across income classes, most recently Dabla-Norris et al (2015) have shown that if the income share of the top 20% increases, GDP growth declines over time, while an increase in the income share of the bottom 20% is associated with higher GDP growth.…”