Inequality and Economic Growth: Bridging the Short-run and the Long-run

I analyze whether the e ect of inequality on growth changes over di erent time-frames (short, medium and long-run). I construct a large dataset that covers the period 1950-2007 and around 100 countries depending on the speci cation. Using restricted system-GMM estimators I nd evidence of a short-run (5-year periods) inverse-U relationship between inequality and growth. This inverse-U relationship remains in the medium-run (10-year periods). However, this association disappears in the long-run (20-year periods). Instead, for this time frame I nd evidence that inequality has a negative e ect on growth in poor countries, but a positive e ect in rich ones. Finally, in the 37-year period (1970-2007) I nd that higher inequality is associated with a lower rate of growth. Thus, while some (but not much) inequality is good for growth in the short-run and in the medium-run, the relationship changes in the long-run when it becomes dependent on the level of income, and in the very long-run inequality has a detrimental e ect on growth. JEL Classi cation: C23, O11, O15