Will Inequality Affect Growth? Evidence from USA and China since 1980

Abstract

Income inequality may hinder economic growth is a widespread concern. The results from previous literature are mixed. Although both USA and China is an excellent case study by itself, it is even interesting to compare them given they are the two largest economies in the world, and yet completely different from each other. We employ annual data from 1980 to 2012 and apply cointegration to study the effects of income inequality on real GDP per capita and real GDP of both USA and China. We also include the exchange rate into the model to examine possible effects of depreciation on growth. The main findings are: first, depreciation does not affect the growth of USA. Second, depreciation promotes growth of China in the short-run, but may hurt its growth in the long-run. Third, income inequality will hurt growth of USA in the short-run, while it encourages its growth in the long-run. Finally, income inequality may promote growth of China in both short-run and long-run.