The relationships between economic freedom, income inequality, and economic growth: empirical evidence from an asymmetric analysis in the case of Greece

Abstract

Single-country studies on the relationship between economic freedom, income disparity, and economic growth are rare, especially investigations on developed economies. This research examines the case of Greece using the nonlinear autoregressive distributed lag (NARDL) method and the Toda-Yamamoto causality test. The findings suggest that prioritizing economic freedom as a long-term goal can reduce income inequality, but per capita income growth promotes equality faster in the medium term. Asymmetric results indicate only positive changes in the impact of economic freedom on income equality in the long run. Additionally, the findings suggest that income inequality negatively affects per capita income in both the short and long term. A rise in the Economic Freedom Index has a negative medium-term impact on Greece's growth but can drive long-term growth. Notably, positive changes in economic freedom increase per capita income, while negative changes decrease it, with negative shocks having a greater destabilizing effect. The main implication that constantly emerges from our empirical investigation is that, in countries where economic freedom is below a certain threshold, even minor reforms promoting economic freedom can effectively reduce income disparity and foster economic growth after an intermediate period.