Income Inequality and the Business Cycle

Abstract

This paper first examines the relationship between ordinary least squares estimators of consumption and investment for 36 selected countries with their respective Gini indices. The analysis shows that income inequality is consistent with a smaller estimator of consumption and a greater estimator of investment. Second, the cycles of GDP, consumption and investment are dated separately to determine how the deepness and duration of cycles of those variables are correlated with the Gini indices of countries. The results show that income inequality leads to a deeper and longer decline of GDP, which causes a greater cumulative income loss of GDP during recession, and a somewhat faster speed of recovery during expansion. Likewise, the result of a correlation between Gini indices and the number of cycles in consumption, investment and GDP indicate that income inequality is associated with a greater number of cycles in consumption and GDP and a lower number of cycles in investment.