Understanding the economic dynamics behind growth–inequality relationships

• Published in: Journal of macroeconomics Vol. 33; no. 1; pp. 14 - 32
• Main Authors: Bandyopadhyay, Debasis, Tang, Xueli
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier Inc 01.03.2011; Elsevier; Elsevier Science Ltd
• Series: Journal of Macroeconomics
• Subjects: Applied general equilibrium models; Economic dynamics; Economic growth; Economic inequality; Economic shock; Externalities; Externality; Growth; Heterogeneous agents; Heterogeneous agents Externality Income inequality Growth Progressive redistribution; Immigration; Immigration policy; Income inequality; Income redistribution; Inequality; Macroeconomics; Microeconomics; New Zealand; Progressive redistribution; Studies; New Zealand; E62; Income inequality; O47; Growth; E24; Progressive redistribution; Externality; O11; Heterogeneous agents
• ISSN: 0164-0704; 1873-152X
• DOI: 10.1016/j.jmacro.2010.06.001

In this paper, a dynamic general equilibrium (DGE) model of growth–inequality relationships, with missing credit markets, knowledge spillover and self-employed agents, is calibrated to New Zealand data. The model explains how two distinct policy shocks involving redistribution and immigration imply, subsequently, two completely opposite outcomes. Agents’ inability to borrow aggravates a negative macroeconomic effect of heterogeneity on growth. Redistribution mitigates that effect but creates microeconomic disincentives on saving and work-effort. Consequently, immigration shocks that perturb variance of efficiency induce a negative growth–inequality relationship, while redistribution shocks, in New Zealand’s case, produce larger fluctuations in incentives than in macro benefits, implying a positive growth–inequality relationship.