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The impact of income inequality on public debt

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  • Carrera, Jorge
  • de la Vega, Pablo

Abstract

In view of the fact that the traditional model of tax smoothing (Barro, 1979) cannot account for the recent generalized increasing trend in public debt (PD), this paper improves the traditional determinants of PD by estimating the impact of income inequality on PD based on a heterogeneous panel of 158 countries over 20 years from 2000 to 2019. First, we find that inequality Granger-causes PD. Then, by using different dynamic panel data methodologies, we find that an increase in inequality is associated with a rise in the PD-to-GDP ratio. This result is robust to different econometric methods and specifications. We find similar results with an alternative measurement of social unrest such as the unemployment rate. Based on these results, we suggest that the dynamics of PD are not only associated to the traditional determinants associated with the tax smoothing across a business cycle, but also to the political and fiscal pressures stemming from changes in inequality and unemployment.

Suggested Citation

  • Carrera, Jorge & de la Vega, Pablo, 2021. "The impact of income inequality on public debt," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    • Handle: RePEc:eee:joecas:v:24:y:2021:i:c:s1703494921000219
    DOI: 10.1016/j.jeca.2021.e00216
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    Cited by:

    1. Jorge Carrera & Pablo de la Vega, 2022. "The Effect of External Debt on Greenhouse Gas Emissions," Papers 2206.01840, arXiv.org, revised Feb 2024.
    2. Jorge Carrera & Pablo De la Vega & Fernando Toledo, 2021. "Income Inequality and Fiscal Policy over the Political Cycle A Panel Estimation Model for Emerging Markets and Developing Economies," Asociación Argentina de Economía Política: Working Papers 4449, Asociación Argentina de Economía Política.
    3. Yacouba COULIBALY & Alexandru MINEA & Patrick VILLIEU, 2022. "How Do Natural Resource – Backed Loans Affect the Public Debt Sustainability in Developing Countries? Empirical Evidence," LEO Working Papers / DR LEO 2937, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.

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    More about this item

    Keywords

    Inequality; Fiscal policy; Public debt; Panel data; International comparison; Financial openness;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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