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Corresponding Author:
Jorge Charles-Coll, Universidad Autonoma de Tamaulipas, Victoria, Mexico

Corresponding Coauthors:
Elisabeth L. MAYER-GRANADOS , Universidad Autonoma de Tamaulipas, Victoria, Mexico

How much Inequality is Harmful for Growth? The Growth Maximizing Rate of Inequality in the Context of the Mexican Economy

(pp. 301-318)
JEL classification: O40, O15, O11
Keywords: Income Inequality, Economic Growth, Mexico

Abstract

This paper contributes to the debate over the relationship between inequality and growth by testing in a country specific context, the proposition in Charles-Coll (2015) of a nonlinear relationship between income inequality and economic growth. The model is tested for the Mexican economy using a highly disaggregated dataset at the municipal level for the period of 2000-2005.  An inverted “U” shaped relationship is demonstrated, showing that low levels of inequality exert a positive correlation with economic growth while high levels have a negative one. Additionally, the findings demonstrate the existence of a growth maximizing rate of inequality (GMRI) that optimizes growth rates and releases the economy from the distortions generated by elevated inequality or taxation.


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