Inequality and savings: a reassesment of the relationship in cointegrated panels

The effect of income inequality on savings and consumption has remained an open empirical issue despite several decades of research. Results obtained in this study indicate that income inequality and private consumption are both I(1) nonstationary variables that are cointegrated, and inequality has had a negative effect on private consumption in Central-European and Nordic countries. Results for Anglo-Saxon countries are inconclusive. These findings suggest that previous empirical research may have produced biased results on the effect of inequality on savings by assuming that inequality would be a stationary variable.Panel cointegration, top 1% income share, private consumption, gross savings

Income inequality in the process of economic development : An empirical approach

This thesis studies the effect of income inequality on economic growth. This is done by analyzing panel data from several countries with both short and long time dimensions of the data. Two of the chapters study the direct effect of inequality on growth, and one chapter also looks at the possible indirect effect of inequality on growth by assessing the effect of inequality on savings. In Chapter two, the effect of inequality on growth is studied by using a panel of 70 countries and a new EHII2008 inequality measure. Chapter contributes on two problems that panel econometric studies on the economic effect of inequality have recently encountered: the comparability problem associated with the commonly used Deininger and Squire s Gini index, and the problem relating to the estimation of group-related elasticities in panel data. In this study, a simple way to 'bypass' vagueness related to the use of parametric methods to estimate group-related parameters is presented. The idea is to estimate the group-related elasticities implicitly using a set of group-related instrumental variables. The estimation results with new data and method indicate that the relationship between income inequality and growth is likely to be non-linear. Chapter three incorporates the EHII2.1 inequality measure and a panel with annual time series observations from 38 countries to test the existence of long-run equilibrium relation(s) between inequality and the level of GDP. Panel unit root tests indicate that both the logarithmic EHII2.1 inequality measure and the logarithmic GDP per capita series are I(1) nonstationary processes. They are also found to be cointegrated of order one, which implies that there is a long-run equilibrium relation between them. The long-run growth elasticity of inequality is found to be negative in the middle-income and rich economies, but the results for poor economies are inconclusive. In the fourth Chapter, macroeconomic data on nine developed economies spanning across four decades starting from the year 1960 is used to study the effect of the changes in the top income share to national and private savings. The income share of the top 1 % of population is used as proxy for the distribution of income. The effect of inequality on private savings is found to be positive in the Nordic and Central-European countries, but for the Anglo-Saxon countries the direction of the effect (positive vs. negative) remains somewhat ambiguous. Inequality is found to have an effect national savings only in the Nordic countries, where it is positive.Tässä väitöskirjassa tarkastellaan tulonjaon vaikutusta taloudelliseen kasvuun empiirisesti paneeliaineistoja käyttäen. Kaksi väitöskirjan kolmesta luvusta tarkastelee tulonjaon suoraa vaikutusta taloudelliseen kasvuun. Väitöskirjan viimeinen luku tutkii tulonjaon epäsuoraa vaikutusta kasvuun tarkastelemalla tulonjaon ja säästämisen yhteyttä. Paneeliaineistot koostuvat useiden eri valtioiden makrotaloudellisista muuttujista. Paneeliaineistojen aikaulottuvuus vaihtelee lyhyestä, jossa mukana on vain muutama aikasarjahavainto kustakin maasta, pitkään, jossa mukana on useita kymmeniä vuosihavaintoja kustakin maasta. Toisessa luvussa tulonjaon vaikutusta kasvuun tutkitaan käyttäen 70 valtion makrotalouden muuttujista koostuvaa paneeliaineistoa sekä uutta EHI2008 tulonjaon epätasa-arvoisuuden mittaa. Luvussa otetaan myös kantaa kahteen tutkimusalueen keskeiseen ongelmaan: yleisesti käytetyn Deininger ja Squiren Gini-indeksin puutteisiin sekä tuloryhmäkohtaisten joustojen estimoinnin ongelmiin. Luvussa esitetään yksinkertainen menetelmä jälkimmäisen ongelman kiertämiseksi, mikä perustuu ryhmäkohtaisten instrumenttimuuttujien käyttöön estimoinnissa. Uudella aineistolla ja menetelmällä saatujen tuloksien mukaan tulonjaon vaikutus taloudelliseen kasvuun on epälineaarinen. Kolmannessa luvussa käytetään niin ikään uutta EHII2.1 tulonjaon epätasa-arvoisuuden mittaa ja vuosihavaintoja 38 valtiosta. Näiden avulla tutkitaan tulonjaon ja taloudellisen kehityksen, eli BKT:n tason, pitkän aikavälin tasapainorelaatioiden olemassaoloa. Paneeliyksikköjuuritestien mukaan logaritmiset EHII2.1 tulonjaon mitan sekä BKT asukasta kohden sarja ovat I(1) epästationaarisia prosesseja. Testien mukaan nämä sarjat myös ovat yhteisintegroituneita astetta yksi, mikä tarkoittaa, että muuttujien välillä on pitkän aikavälin tasapainorelaatio. Estimointituloksien mukaan taloudellisen kasvun pitkän aikavälin jousto tulonjaon suhteen on negatiivinen keskituloisissa ja rikkaissa talouksissa. Yhteyden estimointi on tulokseton köyhien talouksien osalta. Neljännessä luvussa arvioidaan tulonjaon epätasaisuuden vaikutusta yksityiseen säästämiseen ja kokonaissäästämiseen käyttäen väestön ylimmän prosentin tulojen osuutta tulonjaon mittana. Aineisto koostuu yhdeksän kehittyneen talouden makrotalouden muuttujista, ja se kattaa neljä vuosikymmentä alkaen 1960-luvulta. Tuloksien mukaan tulonjaon epätasaisuus lisäsi yksityistä säästämistä Pohjoismaissa sekä Keski-Euroopan valtioissa, mutta Anglo-Saksisten maiden osalta tulokset olivat monitulkintaisia. Tulonjakauman epätasaisuuden havaittiin vaikuttavan kokonaissäästämiseen ainoastaan Pohjoismaissa, joissa sen vaikutus oli positiivinen

Inequality and savings: a reassesment of the relationship in cointegrated panels

The effect of income inequality on savings and consumption has remained an open empirical issue despite several decades of research. Results obtained in this study indicate that income inequality and private consumption are both I(1) nonstationary variables that are cointegrated, and inequality has had a negative effect on private consumption in Central-European and Nordic countries. Results for Anglo-Saxon countries are inconclusive. These findings suggest that previous empirical research may have produced biased results on the effect of inequality on savings by assuming that inequality would be a stationary variable

Estimating the long-run relationship between income inequality and economic development

The relationship between income inequality and economic growth has been one of the most studied questions in the field of economics in recent years. Despite of this there is very little knowledge on the effect on income inequality to long-run growth. This paper addresses that issue using new measure of income inequality and panel data cointegration methods. Results imply that negative effect of income inequality on long-run growth is a dominant feature, but in some countries the effect of inequality is positive. Observed heterogeneity in the long-run effect also explains the controversial findings made on the short-/medium term effect

Inequality and savings: a reassesment of the relationship in cointegrated panels

The effect of income inequality on savings and consumption has remained an open empirical issue despite several decades of research. Results obtained in this study indicate that income inequality and private consumption are both I(1) nonstationary variables that are cointegrated, and inequality has had a negative effect on private consumption in Central-European and Nordic countries. Results for Anglo-Saxon countries are inconclusive. These findings suggest that previous empirical research may have produced biased results on the effect of inequality on savings by assuming that inequality would be a stationary variable