The Dynamic Effects of Urban–Rural Income Inequality on Sustainable Economic Growth under Urbanization and Monetary Policy in China

Abstract

Income inequality in China has become increasingly serious since the beginning of the economic reform period in the 1970s, with urban–rural income inequality playing a large role. Urbanization policy and monetary policy are currently important economic policy tools for the Chinese government. In order to investigate the influence of inequality on the economy and to provide recommendations for ensuring the sustainability of growth, we study the effect of urban–rural income inequality on economic growth in the context of urbanization and monetary policy in China between 2002 and 2021. Using a flexible time-varying parametric structural vector auto-regression (TVP-VAR) model and a robust Markov chain Monte Carlo (MCMC) algorithm, our empirical results show that the effect is time-varying, with inequality promoting growth in the early years but affecting it adversely at later stages. Currently, urbanization mitigates inequality and promotes growth simultaneously, while easy monetary policy worsens inequality and affects growth adversely in the long term. We suggest that the authorities need to consider the implementation of policy rebalancing to ensure that the sustainability of economic development is not jeopardized because of worsening income disparity. Proactive urbanization policy and prudent monetary policy are viable rebalancing options.

The Impact of the Zero-COVID Policy on Income Inequality in China

“…Among those were urban workers, uneducated workers, and female workers. These disparities in the effect of income have been reflected in the increased Gini coefficient [9][10].…”

Inclusive growth in the face of increasing urbanization: What experience for African countries?

“…According to these theories, cities play an important role in economic growth (Krugman, 1991, 1993; Lucas, 1988; Romer, 1986, 1994). Therefore, with the advent of all these theories, there is now a greater emphasis on the role of cities, especially urbanization, in the economic growth process (Cheng & Lin, 2022; Hong et al, 2021; Jiang et al, 2022; Krugman, 1991; Porter, 1990; Trullén & Galletto, 2018; Turok, 2012).…”

“…Their results reveal that urbanization has had various effects on growth in different provinces and that some provinces exhibit a phenomenon called “growth less urbanization” and that this may be due to local governors pushing urbanization too hard so that it can hardly generate positive effects, such as external consumption, technology diffusion, and a larger urban labor pool. Similarly, Cheng and Lin (2022) through a flexible time‐varying parametric vector autoregression model and a robust Markov chain Monte Carlo algorithm studied the effect of urban–rural income inequality on economic growth in the context of urbanization and monetary policy in China between 2002 and 2021. Their empirical results show that the effect varies over time, with inequality promoting growth in the early years but negatively affecting it in later stages.…”

A study of the effect of population aggregation on common prosperity: Evidence from 283 Chinese cities

“…Although non-registered residents (mostly migrant workers) live in the same city as registered residents, they cannot enjoy the same treatment. Household registration discrimination may result in non-registered residents not receiving equal treatment in employment opportunities, children’s education, social security, etc., leading to their aggregation in low-level jobs and living in areas with poor environmental conditions such as urban villages [ 34 ]. Environmental and social public services, social security, and social governance improve slowly either [ 35 ].…”