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ECONOMIC FREEDOM AND INCOME INEQUALITY REVISITED: EVIDENCE FROM A PANEL ERROR CORRECTION MODEL
Author(s) -
APERGIS NICHOLAS,
DINCER OGUZHAN,
PAYNE JAMES E.
Publication year - 2014
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/j.1465-7287.2012.00343.x
Subject(s) - economic freedom , economics , economic inequality , inequality , income inequality metrics , redistribution (election) , income distribution , error correction model , econometrics , causality (physics) , panel data , redistribution of income and wealth , labour economics , macroeconomics , cointegration , mathematics , political science , market economy , mathematical analysis , unemployment , physics , quantum mechanics , politics , law
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 )