Taking Down the Wall: Transition and Inequality

21 Pages Posted: 12 Mar 2020

See all articles by Serhan Cevik

Serhan Cevik

International Monetary Fund (IMF)

Carolina Correa-Caro

Universidad Central - Economics Department

Multiple version iconThere are 2 versions of this paper

Date Written: February 2020

Abstract

This paper investigates the main determinants of income inequality in transition countries during the period 1990-2018. To this end, we address a major methodological challenge that lies at the core of the cross-country literature on income inequality: the potential endogeneity of income growth, which is largely ignored by most empirical studies. We adopt a two-pronged empirical strategy by (i) using trading partners' weighted average real GDP as an instrumental variable (IV), and (ii) estimating the model via the two-stage least squares (2SLS) approach for static models and the Generalized Method of Moments (GMM) estimator for dynamic models. Our empirical findings are consistent with the Kuznets curve that illustrates a nonlinear relationship between income inequality and the level of economic development. We also find that the redistributive impact of fiscal policy is statistically insignificant and taxation and government spending appear to have the opposing effects on income inequality in transition economies.

Keywords: Income inequality, Economic reforms, Economic growth, Demographic indicators, Income distribution, fiscal policy, transition economies, WP, Gini coefficient, Gini, transition economy, control variable, financial development

JEL Classification: D31, D63, O11, O15, E01, E62, H83, O4, Z13

Suggested Citation

Cevik, Serhan and Correa-Caro, Carolina, Taking Down the Wall: Transition and Inequality (February 2020). IMF Working Paper No. 20/32, Available at SSRN: https://ssrn.com/abstract=3553189

Serhan Cevik (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Carolina Correa-Caro

Universidad Central - Economics Department ( email )

Bogotá
Colombia

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