A Reassessment of the Relationship Between Inequality and Growth

Kristin J Forbes
2000 The American Economic Review  
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
more » ... 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. (JEL O40, O15, E25)
doi:10.1257/aer.90.4.869 fatcat:st43tdaxnneddkb7whdodsdklq