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American Economic Review: Vol. 90 No. 4 (September 2000)

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A Reassessment of the Relationship between Inequality and Growth

Article Citation

Forbes, Kristin J. 2000. "A Reassessment of the Relationship between Inequality and Growth." American Economic Review, 90(4): 869-887.

DOI: 10.1257/aer.90.4.869

Abstract

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 of income inequality has a significant positive relationship with subsequent economic growth. This relationship is highly robust across samples, variable definitions, and model specifications.

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Authors

Forbes, Kristin J. (MIT)

JEL Classifications

O15: Economic Development: Human Resources; Human Development; Income Distribution; Migration
O47: Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence


American Economic Review


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