Linearity and causality on the dynamic relationship between income inequality and economic growth: evidence from a high income Latin American country

Linearity and causality on the dynamic relationship between income inequality and economic growth: evidence from a high income Latin American country

  • Juan Gabriel Brida, Bibiana Lanzilotta,Luciana Méndez-Errico ,

Abstract

This paper studies the long-run relationship between income inequality and economic growth in Uruguay, a high income Latin American country. Cointegration techniques are applied by using nonparametric tests and data for the period 1986 to 2014. Linearity of the relationship is tested previously to the estimation of the functional of the relationship between these variables which shows a negative linear long-run relationship between real GDP growth and inequality is obtained. To test causality, the procedure suggested by Holmes and Hutton (1990) is performed. The results find that causality is unidirectional and the effect goes from economic growth to inequality. When the test is performed in differences, significant effects can be identified in both directions. A shock (an unexpected rise or decrease) on the variation of inequality cause effects on growth variation. It follows that in the short-run inequality may affect growth, but not in the long-run, implying that the effect in this direction is transitory.

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