Revisiting the Kuznets Curve: A New Approach to Describe a Bilateral Nonlinear Kuznets Curve

Abstract

Abstract The prior studies regarding the Kuznets curve have obtained inconsistent results regarding the existence of the Kuznets curve. One of the possible reasons for this inconsistency might be a specification error in modeling the Kuznets curve. In other words, the one-sided causality from per capita income to inequality might not make sense. In this paper, we assume a two-sided causality in the per capita income-inequality nexus. Also, we assumed a nonlinear relationship between per-capita income and income inequality as a quadratic form of these two variables. In other words, changes in per capita income may have a nonlinear impact on the inequality level, and inequality levels can determine per-capita income in a nonlinear fashion. For justifying this two-sided nonlinear relationship which means a bilateral nonlinear Kuznets curve, firstly, we have reviewed the literature to explain this type of per capita income-inequality nexus. Second, we have justified this nonlinear relationship by the wavelet coherence approach and finally, we have applied our hypothesis in a dynamic simultaneous panel data model with a quadratic form of both per capita income and inequality. We have used two samples of countries, including G7 + BRICS during 1970–2019, and 129 countries consist of both developing and developed countries during the period of 1980–2019. The empirical results of the wavelet coherence approach indicate that there are two different phases including the same-phase and opposite phase in different time horizons which might reflect the possibility of a nonlinear relationship in per capita income-inequality nexus as well as a two sided causality between per capita income and inequality. Finally, we have estimated different simultaneous equations with different inequality indexes during the different periods using the GMM method. The empirical results indicate that there is a bilateral nonlinear relationship in per capita income-inequality nexus in both samples and different periods. In other words, the results support a bilateral nonlinear Kuznets curve. JEL Classification: D63, D31, C49, C33