This paper shows that the choice of inequality measure has a first-order impact on estimated empirical relationships. Depending on the particular inequality measure chosen, the estimated role of inequality in the transmission channels to economic growth varies and is therefore difficult to pin down with confidence. We run our analyses with six inequality measures (Gini coefficients and Top10 income shares). All six are measured consistently over time and across countries but based on distinct definitions of income—giving rise to measurement uncertainty. Differences in measurement within the set of Gini coefficients and the Top10 income shares exert a significant impact on the estimated relationships, which is generally more pronounced than the effect of switching between Gini and Top10 income shares. Finally, we show that the distinction between short- and long-run effects of inequality also becomes empirically less relevant when we allow for measurement uncertainty. We do not find a unique and stable structural relationship between inequality and the transmission channels.

We study the channels that theoretically transmit the effects of inequality to economic growth, unlike much of the existing literature that focuses on the direct linkage. The role of inequality in these transmission channels is difficult to pin down and varies with the particular inequality indicator chosen. We run our analyses with six methodologically distinct inequality measures (Gini coefficients and Top10 income shares). Methodological differences within the set of Gini coefficients and the Top10 income shares exert a first-order impact on the estimated relationships, which is generally larger than the effect of switching between Gini and Top10 income shares. For a given inequality indicator, we find that the transmission channels can react in opposite directions, with the net effect on growth difficult to determine. Finally, we emphasize two additional but so far underappreciated empirical complications: (i) estimated relationships change over time; and (ii) fragile countries create significant but counterintuitive empirical associations that may obscure structural relationships.

This guidance note describes how to use the Excel-based template developed by the Fiscal Affairs Department (FAD) of the IMF accompanying the note “How to Design a Fiscal Strategy in a Resource-Rich Country.” This template uses data inputs to generate simulations of fiscal policy dynamics. It helps IMF teams and country authorities in RRCs analyze trade-offs associated with alternative fiscal strategies for the use of public resource wealth. Visualizing these trade-offs and assessing their sensitivity to underlying macroeconomic assumptions can help inform policymakers on the most appropriate fiscal strategy, given country-specific circumstances.