Further Evidence on Import Demand Function and Income Inequality

Abstract

In advanced economies, rising inequality has become a significant economic issue. Our paper examines one dimension of the impact of inequality. This study employs panel estimators that tackle heterogeneity and cross-sectional dependence to estimate the impact of income inequality on import demand. In addition, we use a Bayesian approach to the cointegrated VAR model as well as a model that allows for stochastic trends and cross-sectional dependence. Annual panel data for the period from 1995 to 2016 on OECD countries are used. The empirical results show that inequality has a positive and significant effect on import demand. The estimation also yields some other expected results, viz. that the income and price elasticity of import demand function are positive and negative, respectively.