Income inequality and fiscal policy over the political cycle

Jorge Carrera, Pablo de la Vega and Fernando Toledo
Additional contact information
Jorge Carrera: Universidad Nacional de La Plata
Fernando Toledo: Banco Central de la República Argentina y Universidad Nacional de La Plata

Empirical Economics, 2024, vol. 66, issue 1, No 10, 325 pages

Abstract: Abstract We examine the strategic use of public debt to finance compensatory and progressive fiscal policies oriented to lessen the negative effects of income inequality hikes. We exploit the fact that a government seeking reelection will try to avoid the associated social unrest. Thus, higher inequality is expected to exert more political pressure on the government as the next executive election approaches. We estimate dynamic panel models for 79 Advanced Economies and Emerging Markets and Developing Economies (EMDEs) with annual data for the 1990–2015 period. Our findings reveal that the marginal effect of inequality on public debt is increasing in the share of the executive term completed, and it becomes statistically significant after completing 60% of the term. We find that all countries react to increases in inequality by issuing public debt. However, in some countries, this reaction is strongly conditioned by the political cycle—proxied by the share of the executive term completed. This is particularly the case in EMDEs, countries with lower institutional constraints on the executive, and those without any fiscal rule. In addition, a higher degree of financial account openness allows governments to compensate for rising inequality earlier in their mandate.

Keywords: Income inequality; Fiscal policy; Panel data models (search for similar items in EconPapers)
JEL-codes: C33 D31 E62 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s00181-023-02455-1 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:empeco:v:66:y:2024:i:1:d:10.1007_s00181-023-02455-1

Ordering information: This journal article can be ordered from
http://www.springer. ... rics/journal/181/PS2

DOI: 10.1007/s00181-023-02455-1

Access Statistics for this article

Empirical Economics is currently edited by Robert M. Kunst, Arthur H.O. van Soest, Bertrand Candelon, Subal C. Kumbhakar and Joakim Westerlund

More articles in Empirical Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().