An empirical investigation of the relationship between inequality and growth

This paper studies the correlation between inequality, measured by the Gini coefficent of incomes, and the growth rate of per capita GDP in a panel of countries between the late 1950s and late 1990s. Inequality Granger causes growth with a negative coefficient, while growth Granger causes inequality with a positive sign. Quantitatively, the former effect appears much larger than the latter. Once I allow for the effect to differ between rich and poor countries interesting differences emerge. While lagged inequality appears positively correlated with growth in the subgroup of rich countries, in poor countries besides a negative and significant effect of lagged inequality on growth there is a negative and significant effect of lagged growth on inequality