The aim of this paper is to study the potentially simultaneous relationship between income inequality and growth volatility for seventy countries between 1960 and 2002. We start with the revision of the relevant literature, with special regards to the papers that most strongly motivated our research, Iyigun and Owen (2004) and Breen and Garcia-Pealosa (2004). Then, we perform two types of analysis; a cross-sectional analysis based on country averages of all available annual observations, and a panel-data analysis with fixed effects based on 6 - year averages. The cross-sectional and panel estimation results are markedly different. In the first case, there seems to be a mutual relationship between inequality and volatility across countries, but several significant coefficients have illogical signs. In the second case, there is no evidence of simultaneity within a country; inequality seems to be influenced by volatility, but inequality does not have a direct effect on volatility. Given the limitations of the cross- sectional analysis, we believe that the simultaneous relationship found in the cross-sectional model is rather spurious than real.
