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Most Downloaded Articles
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- Who Gets the Credit? And Does It Matter? Household vs. Firm Lending Across Countries by Beck, Thorsten/ Büyükkarabacak, Berrak/ Rioja, Felix K. and Valev, Neven T.
- Monetary and Macroprudential Policy Rules in a Model with House Price Booms by Kannan, Prakash/ Rabanal, Pau and Scott, Alasdair M.
- Is Discretionary Fiscal Policy in Japan Effective? by Rafiq, Sohrab
- In search of lost time: the neoclassical synthesis by De Vroey, Michel and Duarte, Pedro Garcia
Explaining the Evidence on Inequality and Growth: Informality and Redistribution
1Union College, firstname.lastname@example.org
Citation Information: The B.E. Journal of Macroeconomics. Volume 7, Issue 1, Pages –, ISSN (Online) 1935-1690, DOI: 10.2202/1935-1690.1498, January 2007
- Published Online:
This paper constructs a simple model that can account for both the negative relationship between growth and income inequality observed in the cross-country data and the positive relationship observed within countries over time. The model employs a dual-economy structure with formal and informal sectors. Growth is driven by formal sector human capital spillovers. Restrictive institutions impose barriers to formality that reduce the growth rate and increase inequality. Redistributive taxation lowers inequality but blunts the incentive to accumulate, lowering growth. Institutional structures vary more across than within countries. Consequently, variations in institutional barriers to formality may account for the negative relationship between growth and inequality found in the cross-country data. Variations in the intensity of redistribution may account for the positive relationship observed within countries over time.