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Long Term Effects of Fiscal Policy on the Size and the Distribution of the Pie in the UK

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  • Xavier Ramos
  • Oriol Roca-Sagales

Abstract

This paper provides a joint analysis of the output and distributional long term effects of various fiscal policies in the UK, using a Vector Autoregression approach. Our findings suggest that the output effects of fiscal policies are consistent with the Keynesian paradigm for both direct and indirect taxes but not for public spending. The estimated long term impact on GDP of increasing all type of expenditure and taxes analysed is negative and especially strong in the case of current expenditure. We also find significant distributional effects associated to fiscal policies, indicating that an increase in public spending and direct taxes reduces inequality while a raise in indirect taxes increases income inequality. Finally, the relationship between inequality and output is also explored.

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File URL: http://cadmus.eui.eu/dspace/bitstream/1814/7687/1/RSCAS_2007_39.pdf
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Paper provided by European University Institute in its series RSCAS Working Papers with number 2007/39.

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Date of creation: 18 Dec 2007
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Handle: RePEc:rsc:rsceui:2007/39

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Keywords: Fiscal policy; inequality; UK; VAR models;

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  1. Amiel, Yoram & Cowell, Frank A., 1992. "Measurement of income inequality : Experimental test by questionnaire," Journal of Public Economics, Elsevier, vol. 47(1), pages 3-26, February.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  3. Borooah, Vani K & McGregor, Patrick, 1990. "The Decomposition of Income Inequality: An Analysis Based on the Northern Ireland Family Expenditure Survey for 1985," Bulletin of Economic Research, Wiley Blackwell, vol. 42(4), pages 265-83, October.
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  8. Giavazzi, Francesco & Pagano, Marco, 1995. "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," CEPR Discussion Papers 1284, C.E.P.R. Discussion Papers.
  9. Hannu Tanninen, 1999. "Income inequality, government expenditures and growth," Applied Economics, Taylor & Francis Journals, vol. 31(9), pages 1109-1117.
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  11. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies.
  12. Marcellino, Massimiliano, 2002. "Some Stylized Facts on Non-Systematic Fiscal Policy in the Euro Area," CEPR Discussion Papers 3635, C.E.P.R. Discussion Papers.
  13. Amparo Castelló-Climent, 2001. "Desigualdad en la distribución de la renta, políticas impositivas y crecimiento económico en los países de la OCDE," Investigaciones Economicas, Fundación SEPI, vol. 25(3), pages 473-514, September.
  14. Galor, Oded & Tsiddon, Daniel, 1996. "Income Distribution and Growth: The Kuznets Hypothesis Revisited," Economica, London School of Economics and Political Science, vol. 63(250), pages S103-17, Suppl..
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