A Bayesian Reappraisal of the Inequality–Growth Relationship

According to the existing literature, inequality may have a positive, negative, or no association with economic growth.There is still no clear consensus regarding the relationship between inequality and growth making this an active area of research.This study makes an attempt to decipher the impact of inequality on growth and address the issue of model uncertainty utilizing pertinent data on inequality for 56 countries for the time period 1999-2020.First, we document significant stylized facts between inequality and growth and then apply Bayesian Moving Average (BMA) method to examine whether inequality matters in the presence of major growth determinants.Our results indicate inequality does matter in the process of growth.Specifically, we find that inequality has an adverse impact on growth.The Posterior Inclusion Probability (PIP) of inequality greater than 0.70 across all models confirms the negative impact of inequality on growth.Our results withstand various robustness checks.