The effects of income distribution and fiscal policy on aggregate demand, investment and the budget balance: the case of Europe1

Thomas Obst, Ozlem Onaran and Maria Nikolaidi

Cambridge Journal of Economics, 2020, vol. 44, issue 6, 1221-1243

Abstract: This paper develops a multi-country post-Kaleckian model that incorporates the role of the government. One key novelty of the model is that it integrates cross-country effects of changes in both income distribution and fiscal policy. The model is used to estimate econometrically the effects of income distribution and fiscal policy on the components of aggregate demand and the budget balance in EU15 countries. The results show that a simultaneous increase in the wage share in all EU15 countries would increase demand and the primary budget balance in all countries. A simultaneous increase in government spending turns out to boost economic activity in all the EU15 countries, indicating the positive economic effects of expansionary fiscal policy. Moreover, a progressive tax policy that would be implemented simultaneously at the EU level would lead to an increase in output in all countries.

Keywords: Wage share; Fiscal multiplier; Demand regime; Fiscal policy (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:cambje:v:44:y:2020:i:6:p:1221-1243.

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