Investigating the Link Between Income Distribution and Growth Volatility: Panel Analysis of Selected Countries

Abstract

This paper investigates the dynamic relationship between economic growth and income inequality, with a particular focus on how inequality levels shape countries’ resilience to crises. The central question is whether more equitable income distribution contributes to greater growth stability, especially during periods of financial turbulence. To address this, we estimate panel VECM models for 26 European and Asian countries over the period 1995–2022. The results indicate that countries with more equal income distributions did not
experience more stable growth rates during crises, as confirmed by dynamic modeling and the Chow breakpoint test. Furthermore, the financial crisis shock was not observed in high-inequality countries, whereas it was present in lower-inequality countries. This outcome is linked to structural features, particularly the strength of the industrial base and domestic demand, which act as buffers against external shocks.