Income Distribution 1 - Jonathan D Ostry Andrew Berg and...

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1 I M F S T A F F D I S C U S S I O N N O T E SDN/14/02 Redistribution, Inequality, and Growth Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides February 2014
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INTERNATIONAL MONETARY FUND Research Department Redistribution, Inequality, and Growth Prepared by Jonathan D. Ostry, Andrew Berg, Charalambos G. Tsangarides 1 Authorized for distribution by Olivier Blanchard February 2014 JEL Classification Numbers: O11, O15, O47, E62, H23 Keywords: Redistribution, Inequality, Growth Author’s E-mail Address: [email protected]; [email protected]; [email protected] 1 We thank Olivier Blanchard and numerous IMF colleagues for useful comments, Frederick Solt for help with the data, Yorbol Yakhshilikov for superb research support, and Anne Lalramnghakhleli Moses for assistance. DISCLAIMER: This Staff Discussion Note represents the views of the authors and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management. Staff Discussion Notes are published to elicit comments and to further debate.
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3 C ONTENTS P AGE Executive Summary .................................................................................................................. 4 I. Introduction ............................................................................................................................ 5 II. A Review of the Literature on Equality, Redistribution and Growth ................................... 7 III. Inequality and Redistribution: Some Facts ....................................................................... 11 IV. Inequality, Redistribution, and Growth: Empirical Results .............................................. 15 A. Medium-term growth .............................................................................................. 17 B. Growth spell duration ............................................................................................. 21 V. Conclusion .......................................................................................................................... 25 References……………………………………………………………………………………27 T ABLES 1. Correlation Between Redistribution and Transfers ............................................................. 13 2. Correlation Between Market Inequality and Redistribution ............................................... 15 3. The Effect of Inequality and Redistribution on Growth ...................................................... 18 4. Alternative Samples: Inequality, Redistribution, and Growth ............................................ 20 5. The Effect of Inequality and Redistribution on the Duration of Growth Spells ................. 22 6. Alternative Samples: Inequality, Redistribution, and the Duration of Growth Spells ........ 25 F IGURES 1. Interrelationships Between Inequality, Redistribution, and Growth ..................................... 9 2. Evolution of Market and Net Inequality, 1960–2010 .......................................................... 14 3. Market and Net Inequality by Country Group .................................................................... 14 4. Growth, Inequality, and Redistribution….. ......................................................................... 16 5. Duration of Growth Spells, Inequality, and Redistribution ................................................. 16 6. The Effect of Inequality and Redistribution on Growth ...................................................... 19 7. Redistribution: The Top 25 Percent and the Bottom 75 Percent ......................................... 23 8. The Effect of Inequality and Redistribution on Growth Spell Duration ............................. 24
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4 E XECUTIVE S UMMARY Economists are increasingly focusing on the links between rising inequality and the fragility of growth. Narratives include the relationship between inequality, leverage and the financial cycle, which sowed the seeds for crisis; and the role of political-economy factors (especially the influence of the rich) in allowing financial excess to balloon ahead of the crisis. In earlier work, we documented a multi-decade cross-country relationship between inequality and the fragility of economic growth. Our work built on the tentative consensus in the literature that
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