Inequality and Fiscal Policy Effectiveness

Ju Hyun Pyun () and Dong Eun Rhee
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Ju Hyun Pyun: Korea University Business School (KUBS)
Dong Eun Rhee: Myongji University

No 14-2, Working Papers from Korea Institute for International Economic Policy

Abstract: This paper examines the role of income inequality in determining fiscal policy effectiveness by using panel data of 42 advanced and developing countries during Q1 2000-Q3 2007. Our panel VAR analysis shows that the effect of fiscal policy on output is smaller in economies with high income inequality: the 1-year fiscal multiplier for a country with relatively equal income distribution is estimated to be significant at 0.52 or greater significantly, while that for a country with relatively unequal income distribution is insignificant from zero. The responses of consumption to an expansionary fiscal policy shock show that consumption is more crowded-out for relatively more unequal economies, thus affirming that the low-income households in the economies with high inequality tend to have strong incentives to save additional income from fiscal policy for precautionary reasons.

Keywords: Income Inequality; Fiscal Multiplier; Panel VAR; Dynamic PanelEstimation; Precautionary Savings (search for similar items in EconPapers)
Pages: 38 pages
Date: 2014-12-30
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Persistent link: https://EconPapers.repec.org/RePEc:ris:kiepwp:2014_002

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