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The purpose of this paper is to investigate the effects of income inequality on the economic growth of Brazilian states in the period from 1994 to 2014. The transmission mechanism of the effects of income inequality on economic growth is derived from the model proposed by Halter et al. (2014).

The empirical formulation adopted to achieve this goal is divided into two stages. The first stage is limited to short-term analysis, and panel data models with fixed effects, random effects, and instrumental variables are used. In the second stage, the discussion turns to the use of the error correction model for a cointegrated panel.

The findings of this study suggest that inequalities in income and educational level are the principal determinants of different growth rates among Brazilian states. More specifically, it is found that additional years of schooling positively influence growth. By contrast, income inequality negatively affects this indicator.

The present study differs from the others in that it adapts the discussion proposed by Halter et al. (2014) to the analysis of Brazilian states. Halter et al. (2014) derive the transmission channel between income inequality and economic growth, showing a non-monotonic adjustment trajectory of production that leads to a linear theoretical model of income inequality and economic growth that is similar to those used in this type of approach.