Drivers of Income Growth Inequality

ABSTRACT This paper investigates the drivers of (global) income growth inequality (across 45 countries) for the period over 1980–2020. The empirical investigation is based on a structural vector autoregression model, where contributions of global (cross‐country) inequalities in inflation, financial depth, fiscal policy, and (international) trade are considered. The results suggest that these global inequality measures explain most of the volatility in global income growth inequality (by 63%), where the global fiscal inequality contributes the most (46%), followed by the global finance inequality (7%), the global trade inequality (6%) and the global inflation inequality (5%). Although shocks to global inequalities in inflation, financial depth, fiscal policy, and trade all increase the global income growth inequality in a statistically significant way, the effects of shocks to the global fiscal inequality dominate those of others. It is implied that international policy coordination in terms of fiscal policy would be essential to reduce the global income growth inequality, although other international policy coordination in terms of monetary, financial, and trade policies can also be used with relatively less (but significant) effects.