Effects of income inequality on China’s economic growth

A pilot empirical study is carried out on how income inequality affects growth through incorporating panel data information into a quarterly macro-econometric model of China. Provincial urban and rural household data are used to construct income inequality measures, which are then used to augment household consumption equations in the model. Model simulations test the inequality effect on GDP growth and its components. Results show that income inequality forms robust explanatory variables of consumption and that the way inequality develops carries negative consequences on GDP and sectoral growth.