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The causal relationships between country-level economic development and inequality remain a matter of considerable debate and policy interest. This chapter contributes to the literature on this topic by presenting the results of short-run and long-run Granger causality tests in both directions. Countries are classified according to the combination of positive and negative one-way and two-way causal relations found to be statistically significant. This challenges universal theories by distinguishing between 11 clusters of countries according to the Inequality-Growth causal nexus they display over time. The empirical findings on the existence of distinctive features of each of the regional groups can be consistent with the main arguments of the varieties of (welfare) capitalism in a way that each regional group may have largely been institutionalised by stronger (or weaker) (re)distribution systems and/or by inequality enabling (or restraining) growth potential. The findings are also consistent with the theory of an ‘N’-shaped relation between national income per person and inequality: in other words, it confirms that for many high-income countries growth is associated with rising inequality.
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- Stylised Fact of the Changing Inequality-Growth Landscape
Seung Jin Baek
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