Economic Growth and Inequality: The Role of Fiscal Policies

Leonel Muinelo-Gallo and Oriol Roca-Sagalés

Working Papers from Department of Applied Economics at Universitat Autonoma of Barcelona

Abstract: This paper analyses the impact of different instruments of fiscal policy on economic growth as well as on income inequality, using an unbalanced panel of 43 upper-middle and high income countries for the period 1972-2006. We consider and estimate two individual equations explaining growth and inequality in order to assess the incidence of different fiscal policies. Firstly, our approach considers imposing orthogonal assumptions between growth and inequality in both equations, and secondly, it allows growth to be included in the inequality equation, and inequality to be included in the growth equation. The empirical results suggest that an increase in the size of government measured through current expenditures and direct taxes diminishes economic growth while reducing inequality, being public investment the only fiscal policy that may break this trade-off between efficiency and equity, since increases in this item reduces inequality without harming output. Therefore, the results reflect that the trade-off between efficiency and equity that governments often confront when designing their fiscal policies may be avoided.

Keywords: fiscal policy; inequality; growth; panel data models (search for similar items in EconPapers)
JEL-codes: C23 D31 E62 O47 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2011-02
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Related works:
Journal Article: ECONOMIC GROWTH AND INEQUALITY: THE ROLE OF FISCAL POLICIES (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:uab:wprdea:wpdea1105

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