ECONOMIC FREEDOM AND INCOME INEQUALITY REVISITED: EVIDENCE FROM A PANEL ERROR CORRECTION MODEL.

We investigate the causal relationship between income inequality and economic freedom using data from U.S. states over the period 1981 to 2004 within a panel error correction model framework. The results indicate bidirectional causality between income inequality and economic freedom in both the shor...

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Bibliographic Details
Published in:	Contemporary Economic Policy Vol. 32; no. 1; pp. 67 - 76
Main Authors:	APERGIS, NICHOLAS, DINCER, OGUZHAN, PAYNE, JAMES E.
Format:	Article
Published:	Wiley-Blackwell Jan2014
Subjects:	United States Income inequality Economic development research United States economic policy Error correction (Information theory) United States economy
Online Access:	View this record in EBSCOhost

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Summary:	We investigate the causal relationship between income inequality and economic freedom using data from U.S. states over the period 1981 to 2004 within a panel error correction model framework. The results indicate bidirectional causality between income inequality and economic freedom in both the short and the long run. These results suggest that high income inequality may cause states to implement redistributive policies causing economic freedom to decline. As economic freedom declines, income inequality rises even more. In other words, it is quite possible for a state to get caught in a vicious circle of high income inequality and heavy redistribution. (JEL D63, H11 )