Channels Through Which Income Inequality Influences Growth: Fiscal and Political Instability Approaches

The present work encloses an analysis related to the channels through which income inequality affects economic growth and another related to the sources of economic growth. In the first, we use two-stage estimation with fixed effects finding that the fiscal effects of inequality on growth may depend on the government expenditure covariate. Secondly, we constructed a political instability index using principal components analysis, and look at its influence on income inequality and economic growth using dynamic panel data analysis for the 32 Federal Entities of Mexico. We find that political instability is bad for growth, and the fiscal effects of inequality on growth are not conclusive and need to be studied taking into account different fiscal variables.