The semiparametric analysis of inequality and growth using panel data

Beginning in the 1950s, mainstream economists became interested in the forces that determine income inequality. Initially, this interest focused on the relationship between development and income inequality. More specifically, this debate was framed in terms of the Kuznets Hypothesis, which holds that during the initial phases of development, income inequality rises and then peaks, and then falls during the later stages of development. During the early 1990s, as interest in the topic of economic growth surged, this debate shifted attention to the relationship between economic growth and income inequality. The first chapter of this dissertation will survey the development of the growth and inequality literature.; Currently, there are two main branches in the research concerning growth and inequality: (1) how base period inequality effects subsequent economic growth, and (2) how past economic growth impacts subsequent inequality. With regard to the latter, little empirical research has been conducted. With regard to the former, much research has been conducted, but little consensus has emerged as to the true nature of the relationship between base period inequality and subsequent growth. This is due in large part to three factors: (1) lack of availability of high-quality data, (2) use of temporally restrictive models (i.e. cross-sectional models), and (3) use of highly-specific and restrictive functional forms in regression models. As a consequence, chapter 2 will introduce a semi-parametrically specified panel model (over income inequality) that makes use of the latest dataset on inequality in order to investigate how current inequality impacts future growth. This new model yields results that are very different from the existing literature. Likewise, chapter 3 will introduce a semi-parametrically specified panel model (over income inequality) that makes use of the latest dataset on inequality in order to investigate how past growth impacts current inequality. The results of this model are consistent with theoretical macroeconomic models that make use of minimum consumption requirements.