Trade and inequality: evidence for nonlinear dependencies and feedback

Abstract

In this thesis, our objective is to identify the nature of the dependence or causal relationships that exists between trade and income inequality. We use monthly data for a group of 14 developing countries and apply Johansen’s linear cointegration, linear Granger causality, B.D.S test for non-linear dependence and non-linear Mackey-Glass Granger-type causality. The contribution of this thesis lies -mainly- on the application of the Mackey-Glass Granger-type causality for identifying nonlinear dependencies between trade and inequality. We identify a curious bi-directional relationship where trade causes non-linearly inequality and inequality causes linearly trade. This means either that inequality does not converge into a steady state or equilibrium point, or that it converges with periodic or aperiodic short-term oscillations around it. This evidence has a very important implication, that it is rather impossible to control inequality between trading countries.