Evidence from panel data studies also indicates that the effect of inequality on growth might depend crucially on the level of the development and the time horizon of the growth spells (short term vs long term). Brueckner and Lederman (2018) find that income inequality may be beneficial for transitional growth in poor countries but becomes harmful for growth in economies with high average income, contradicting the results by Barro (2000). Regarding the time horizon, Halter, Oechslin, and Zweimüller (2014) find that higher inequality is beneficial for economic performance in the short term, but in the long term the net effect of the relationship tends to be negative. Inequality reduces the duration of growth spells (Berg, Ostry, and Zettelmeyer 2012; Berg and Ostry 2017), with most of the results coming from cross-country differences rather than changes over time.

Banerjee and Duflo (2003) find a nonlinear relationship between changes in inequality and growth. In particular, growth is an inverted U-shaped function of changes in inequality such that a change in the Gini coefficient in either direction is correlated with lower future growth. This empirical result strongly rejects the standard linear specification of cross-country growth regressions and suggests an explanation for the seemingly contradictory results obtained in the literature. However, the non-linear relationship could also reflect omitted variables in the empirical model. For instance, Aiyar and Ebeke (2020) show that the negative effect of inequality on growth largely depends on the degree of intergenerational mobility. In countries with higher intergenerational mobility, the negative impact of income inequality can be more easily reversed because the poor have more opportunities to improve their living standards. In particular, they show that in their specification, the nonlinear term proposed by Banerjee and Duflo (2003) is not statistically significant, suggesting that intergenerational mobility could be capturing the nonlinear relationship between inequality and growth.<sup>15</sup> The lack of robust results on the effect of inequality of growth using panel data may reflect not only issues of correct specification but also an insufficient way of dealing with endogeneity, particularly the use of weak instruments (Kraay 2015).

In sum, the mixed evidence of the impact of inequality on growth arises primarily based on whether the study used a cross-country approach (which includes between-country inequality) or a panel data approach (which includes only within-country variation over time). Given that some of the key mechanisms linking inequality to growth—such as institutional quality, credit constraints, and redistribution policies—do not change much over time, the influences of those channels are greater in the cross-country than the time series dimension. Given that channels such as political economy and credit constraints generate a negative impact of inequality on

> 15 The relationship between intergenerational mobility and growth is complex and may depend on inheritance laws and uncertainty of property rights. Cerra et al. (2021, Chapter 18) examines these issues in more detail.

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