Inequality and Growth: Does Time Change Anything

The econometric analysis of economic growth has always been subject to major flaws and shortcomings. Data scarcity and reliability, parameter heterogeneity, omitted variables bias, endogeneity problems, ... have seriously tainted estimation results. In this paper we propose an alternative framework that explicitly deals with these issues. We investigate the relation between income inequality and economic growth in a number of OECD countries in a cointegrated VAR-setting. Our results suggest that different models seem to hold for different countries. However, for most countries the imperfect markets model better describes reality than the complete markets model.