Assesment of the relationship between Inequality and Economic Growth: A panel Data Approach

The relationship between income distribution and economic growth has been found to depend on several factors such as capital markets imperfections, moral hazard, indivisibility in investments, and existence of dual economic characteristics. In recent literature the importance of geography has been emphasized in defining this relationship due to it’s relevance to trade and openness. The current work assesses how income inequality influences growth stimating a reduced form growth equation. Using dynamic panel data analysis for the 32 States of Mexico with both, urban personal income for grouped data and household income from national surveys, it is found that inequality and growth are positively related. When analysing different periods, two different relationships emerge: 1) a negative influence of inequality on growth in a period of low trade policies, and a positive influence in a period more open trade, when urban personal income is considered, and 2) the relationship is reversed when monetary household income is used. To complete the research, we also estimated a structural form equation taking into account the fiscal effects of inequality on growth, finding that the relationship is positive but requires improvement of the explanatory variables involved