Does Income Inequality Promote Economic Growth?

We derive a model in which we show that economic growth is directly affected by a change in marginal propensity to consume. We apply the vector error correction model, results from which show that Gini coefficient – a measure of income inequality – negatively affects marginal propensity to consume. Therefore, we concluded that a rise in income inequality would negatively affect marginal propensity to consume and thereby economic growth in the long-term and the short-term both. The short-term effect will show up with a one-period lag. JEL Classification: E20, E21, E25, O4.